Commodities | Dec 03 2020
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.