Are Deficits Looming In Battery Materials?

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Many projects supplying battery materials have been suspended because of low prices and/or pandemic-created restrictions. Is a deficit looming?

-Demand for battery materials to accelerate
-Higher prices should follow
-Unlikely supply will meet demand projections
 

By Eva Brocklehurst

Battery materials and the trajectory of demand continue to be a hot topic and, as prices have slumped and caused many projects to be suspended, could deficits now be expected?

The inexorable rise of the electric vehicle (EV) is being encouraged by governments globally, whether through subsidies or outright policies. In fact, UBS suspects it may become very expensive in the not too distant future to continue driving a vehicle with a internal combustion engine.

As costs of producing EV batteries come down, such that the cost difference to conventional vehicles is erased by 2024, UBS forecasts around 40% EV penetration by 2030 that should drive a 13 fold increase in battery manufacture.

As a follow-on, demand for raw materials should substantially increase the market size for lithium, natural graphite and cobalt. Yet prices for most of these commodities have been below the incentive price for some time.

UBS asserts prices need to rise to incentivise idled capacity to return, not only to ensure supply in the short term but to encourage exploration and investment. JP Morgan agrees that significantly higher prices are required to ensure new projects and meet even conservative demand scenarios.

What Are Incentive Prices?

On an incentive-based model, both brokers lift price forecasts by 10-25%. JP Morgan, across a sample of known projects, indicates that US$600/t for spodumene, US$10,500/t for battery grade lithium carbonate and US$12,000/t for battery grade lithium hydroxide are required to provide incentives to undertake new projects.

The broker acknowledges, given the sector is immature, risks around assumptions and forecasts are significant but now capital is being attracted to this market. Moreover, the constant evolution of technology is likely to impact demand, in terms of advancing EV penetration, as well as affect supply, in terms of development and exploration.

Recent supply disruption has increased interest in the lithium space, Morgan Stanley notes, although news that Altura Mining ((AJM)) has entered administration, suspending its 20,000tpa Pilgangoora operation, is unlikely to send the market into deficit alone.

Yet if the project ceases production altogether, it would tip the market into a small 2021 deficit, in the broker's view, while spare capacity at existing producers could restore the balance.

Morgan Stanley calculates there is spare capacity in spodumene – Galaxy Resources ((GXY)), Pilbara Minerals ((PLS)) and Greenbushes – and brine – Orocobre ((ORE)) – which amounts to around 28,000t.

More easy supply is available at Wodgina – Mineral Resources ((MIN)) and Albemarle – with a capacity of 100,000tpa which the broker calculates could be brought on with a sustained spodumene price of US$450-500/t.

Supply/Demand Balance

Morgan Stanley calculates a 1.5% increase in the penetration of battery EVs in Europe could shift the market into balance and this would require an uplift of 11,000t of lithium over 2021-23, excluding expansions.

On the supply side, JPMorgan highlights a history of underperformance in the raw materials industry, in terms of volume and quality, as well as project delays because of low prices and the pandemic, which is particularly the case in Argentina.

As the industry is experiencing its first cyclical bottom since the inception of modern EV the broker believes the supply side needs to move quickly to meet forecasts, and this includes a timely development of new projects and perhaps include less traditional sources such as higher cost, risky clay deposits.

UBS suggests lithium production will be particularly challenged and deficits are inevitable, even including all projects whether they be under construction, in the feasibility stage or still being explored.

The biggest supply deficit as a percentage of projected market size in 2030, the broker envisages, is for rare earths, commencing from 2022 and representing 47% of the market, followed by natural graphite where a deficit emerges beyond 2026 and represents 43% of the market in 2030. In the case of lithium, the broker envisages a deficit beyond 2027, equivalent to 34% of the market in 2030.

While equities exposed to battery raw materials have risen from their lows they remain below 2018 peaks, and the broker considers the sector exposure attractive, retaining Buy ratings for all preferred names such as Glencore, Lynas Corp ((LYC)), IGO Ltd ((IGO)), Norilsk, Galaxy Resources, Syrah Resources ((SYR)) and Orocobre.

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