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Lithium: Some Realities

Commodities | Sep 26 2017

Brokers warn that lithium demand may not grow as quickly as assumed while short term the market remains oversupplied.

– The impending death of the internal combustion engine
– Some realities about EV adoption
– The issue of infrastructure
– Impending supply response


By Greg Peel

Over recent months, France, the UK, Norway and India have laid out plans to ban the sale of internal combustion-powered vehicles by dates ranging from 2025 to 2040. The Netherlands and Germany are thinking about it, although in Germany’s case the benefits are largely offset by the country’s major source of power generation being coal.

At the corporate level, British Telecom (BT) has declared it will replace its fleet of thousands of service vehicles with electric or hybrid vehicles, while France’s PSA Group, which owns Citroen and Peugeot, plans to electrify 80% of its range by 2023.

As these announcements have rolled out, the price of lithium has enjoyed a renewed surge. And while their share prices remain highly volatile on a daily basis, Australian lithium miners such as Orocobre ((ORE)), Galaxy Resources ((GXY)), Mineral Resources ((MIN)) and Pilbara Minerals ((PLS)) have ridden the wave.

The clincher came earlier this month when China announced that it, too, will ban fossil fuel vehicles, with a timetable now being determined. China is the world’s biggest auto market. The lithium price had another leg up.

The lithium story is the latest bandwagon for excitable investors to jump on, as we’ve seen for the likes of rare earth metals and uranium in past years. The lithium story is not new – the price has had more than one burst over recent years on the same theme – but from humble beginnings it now appears electric vehicles (EV) are set to pretty quickly take over the world.

But is this really the case?

Of Chickens and Eggs

Most of the EVs being produced today are of the plug-in variety. Were Australia to make a similar announcement regarding an ultimate ban on fossil fuel power, which of course would never happen under the current government, the next step would be to begin rolling out the infrastructure – plug-in points. Otherwise EV owners are restricted to out-and-back trips from home where their vehicles can be recharged.

Is it worth Australians investing in a plug-in EV when they are reliant on the government rolling out highly extensive infrastructure? Is it worth the government spending billions on such a rollout when EV sales remain in their infancy?

One solution is the EV with modular battery array, such that batteries can be swapped at the service station a la barbeque gas bottles when flat. This would require very little in the way of infrastructure retrofit, one assumes, yet all talk seems to be of plug-ins.

Other cities in the world are moving to install plug-in infrastructure but as one can imagine, the scale of the exercise is substantial.

A lot of the focus is on cars, but what about commercial vehicles?

Resource analysts at Citi cite the example of bus fleets. Many fleets across the world are currently undertaking “pilot programs”, the analysts note, typically involving only 8-10 electric buses. To build out the charging infrastructure for a typical fleet of 500 buses would add some 500MW of charging demand, or about as much as a midtown New York City skyscraper.

As a commercial enterprise, and being of an out-and-back nature, bus companies would need to build their own depot infrastructure. This cannot be done on a modular basis, Citi notes, but rather full scale capacity would have to be installed prior to a fully electric fleet being rolled out. It would not be a matter of slowly converting to EVs over time.

Which bus companies can afford it?

Now take trucks. Clearly, if all road transport was converted to electric from diesel, the climate would be much the better for it. But a big semi-trailer needs a big battery.

The current estimate is that a 200 mile Class 8 truck would require a 400kWh battery, weighing 6,000lbs. After having spoken to experts in the field, Citi estimates that once one takes into account a five-year operating period, additional power needs such as air conditioning, and the natural discharge and degradation of a battery over time, a more realistic battery needs to be at least 1300kWh, which would weigh 19,000lbs.

In other words around 600kg as opposed to 180kg.

Now let’s look at it from the other side: electricity generation.

Any Australian can imagine that if we all went out and bought an EV tomorrow and plugged it in that night, the whole country would black out. That’s just Australia.

Despite the obvious need for more electricity to charge the world’s EVs (net, one assumes, of the electricity required to bring crude oil to the pump as petrol/diesel), there are benefits to be had from longer term large scale EV adoption, Citi notes. The grid would benefit from flattening the daily net load (smoothing out peak/off-peak demand).

But this would require adapting completely new dynamic rate structures alongside significant investment in public charging infrastructure. Again, which government is going to undertake that investment?

Citi’s overall conclusion is such:

While we acknowledge the fast-moving nature of the industry and technology, our early feedback highlights a number of roadblocks that are standing in the way of rapid adoption rates over the next decade, at least.

Citi also acknowledges that its scepticism could be overturned were new electricity grid rate structures adopted faster than assumed, making full scale commercial fleet conversion more viable. Or if breakthroughs in battery technology led to significant improvements in the energy density and longevity of batteries which reduce weight and cost. Or if improvements in battery recovery technology, such as regenerative braking, made their mark.

But for now, Citi is effectively warning not to get too caught up in the hype just yet.

On Lithium Supply

The lithium price jumped 80% in 2016, Macquarie notes, sending project developers scrambling to accelerate mine production. The pace of price increase has been relatively more sedate in 2017, and indeed lithium hydroxide export prices out of China have actually fallen amid signs of overcapacity at the converter stage.

However, lithium is again all the rage since the aforementioned announcements were made by various countries/companies regarding target dates for full EV conversion. Thus the broker has recently assessed its EV demand forecasts and, subsequently, lithium demand forecasts.

Macquarie sees global demand for EVs, plug-in EVs and hybrid vehicles growing at a compound annual rate of 44% between 2017 and 2022. That translates into a 27% rate of growth in lithium demand. On that basis the lithium demand/supply equation should be tight from 2020 on.

But over the next three years the broker still sees an oversupplied market due to new mine projects coming on line. A case in point is Mineral Resources’ Wodgina mine. Prior to the first direct shipment ore flowing from Wodgina, the price of lithium into China was $600/t. It then fell to $200/t.

The recent ramp-up of Australian lithium projects means Australia is set to topple Chile as the world’s largest supplier. Macquarie forecasts supply growth of 20% per annum over the next three years. On that basis, the broker remains near term bearish on lithium prices.

Goldman Sach’s view is not dissimilar to that of Macquarie, but differs in timing. Goldman forecasts lithium demand to grow fourfold from 2016 to 2025 and for the demand/supply equation to remain tight until 2020 before slipping in 2020-22 when a series of global greenfield and brownfield expansion projects come on line.

However, Goldman can also see tightness continuing after 2020 for two reasons.

On the demand side, the broker notes EVs dominate underlying assumptions as penetration grows, battery sizes continue growing, and lithium content per kWh increases. On the demand side, Goldman highlights the historical challenges of bringing lithium projects on line.

The conclusion can only be that nothing can ever be cut and dried where a Brave New World is involved. Investors nevertheless need to be cautious.

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