Regulations, tight supply and pricing mechanisms: Major headwinds for the battery materials market

Topics including regulation concerns, high prices and tight global supply of lithium as well as the need for price transparency dominated conversations and presentations at this year's European Battery Raw Materials Conference in Barcelona

European battery raw material regulations key hurdle for new supply

Europe’s existing regulatory approach toward battery materials mining and processing is one of the key factors preventing the region from bringing on new localized supplies and attracting further investment to spur production.

Attendees at Fastmarkets’ European Battery Raw Materials 2022 conference, held on September 20-21 in Barcelona, Spain, kept returning to the fact that while Europe is abundant in essential raw materials such as lithium, the tight regulatory environment is preventing those supplies from being exploited, when extracting that material could prove to be a very attractive investment opportunity.

European Commission president Ursula von der Leyen recently announced the introduction of the European Critical Raw Materials Act to secure the raw materials needed for the energy transition, but regulations for mining and processing the materials in Europe remain strict.

Lithium prices in Europe remain close to record highs, with global supplies tight

Fastmarkets’ price assessment for lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price ddp Europe and US was $75.50-79.00 per kg on September 22, up 54% from the beginning of the year.

>> Click here to find out more about Fastmarkets’ price data for battery materials

Several lithium projects have already run into high-profile challenges due to regulatory issues. Savannah Resources’ Barosso lithium mine faced political and bureaucratic delays, as well as opposition from local community groups this year.

In January, the Serbian government revoked Rio Tinto’s exploration license for its Jadar mine after months of protests from local communities and environmentalists.

“We hear a lot of stories about [Europe doesn’t] have these materials. That’s not true, we do have a lot of these materials, also within Europe. Europe is very underexplored, so there are plenty of opportunities for these materials to be found in Europe and elsewhere,” Massimo Gasparon, director of the European Raw Materials Alliance, said during a panel on Tuesday, September 20.

The restrictive regulatory environment also makes it less attractive for investors to allocate capital due to the uncertainty of when, or if, a project will be able to legally produce.

“No one wants to invest into something that might or might not happen, so there needs to be a certain level of certainty when it comes to the [mining] permitting,” Gasparon said. “Not only certainty, but also things that need to happen much faster than what they are actually happening now.”

US battery raw material supply also faces similar challenges due to rigid regulatory frameworks. While the Inflation Reduction Act will spur investment, there are additional requirements regarding material origin that could constrain certain imports in the coming year.

Western nations looking to meet decarbonization goals will likely face volatility in battery raw material supply in the coming years, especially for lithium, with government regulations constraining new supply from quickly coming online.

Supply growth is expected in the coming years, with Fastmarkets Research forecasting a surplus of 11,500 tonnes lithium carbonate equivalent for 2023, but long periods of supply surpluses are expected to be quickly offset by consumption from consumer restocking.

“Where we see the surpluses, we expect those to happen when there is a concentration of new supply coming on stream over a short period of time. We’ve seen that in the past – we saw that in 2018,” said William Adams, Fastmarkets’ head of research, battery and base metals.

“The market, though, is that much bigger now on the demand side, so we don’t expect such a similar reaction on the prices,” he added. “The surpluses will enable periods of restocking, and that will be needed by the industry, and we do expect that sort of those surfaces will easily be absorbed in time as we see relentless demand growth.”

>> Fastmarkets NewGen Long-Term Forecasts include a 10-year outlook on supply, demand and prices for lithium and other battery materials. Find out more here.

Proposed lithium classification spurs more supply, investment uncertainty

The European Chemicals Agency’s (ECHA) proposal to classify lithium as a Category 1A ‘reproductive toxin’ is another key piece of regulation that could prevent more supply and investment from coming online.

“We are already in a situation of competition and undersupply of resources. If the EU classifies a substance, it’s clear that it’s not incentivizing investment in that area,” said Francesco Gattiglio, director of external affairs, EU, at lithium producer Albemarle.

Gattiglio said the EU and ECHA’s proposal to classify lithium as a toxin is contradictory to the trading bloc’s Critical Raw Materials Act.

“I’m really happy that Ursula von der Leyen announced the Critical Raw Materials Act, because I think that one of the key points that should be addressed by this act is this contradiction, because it is really creating problems of investments in Europe,” he said.

The classification could also mean that downstream battery manufacturers would not be able to acquire key ingredients to produce end products, and, on a broader scale, could potentially prevent the EU from meeting its decarbonization goals on time.

Some market participants said if lithium is classified as a toxin, there will be knock-on effects to the flow of other battery raw materials, such as graphite.

“Anything that reduces the production of the cells in Europe will reduce the demand for the inputs in Europe, which will mean we will sell less into Europe,” Joe Williams, technical marketing manager at graphite producer Syrah Resources, said on a panel on September 21.

In addition to toxicity classifications, a lack of clarity on what EU emissions regulations in air, water, soil and exposure levels to workers will be in a decade’s time also adds to further uncertainty, leading to hesitations in further investments on the supply side Gattiglio said.

Further growth, and investment reliant on developments in pricing transparency

Market participants expect battery materials markets, such as lithium, to get tighter, especially with new Western-origin supply slowly coming online due to the strict regulations on battery materials projects mentioned above.

Pricing transparency helps provide potential investors with the visibility of how much materials are worth and what they will be potentially worth in coming years, helping them make decisions on whether to put money into battery raw material projects.

Market participants said developments in transparency of both the spot and forward prices in crucial minerals such as lithium has helped the market mature in recent years.

“Once you start hedging, then you build a forward curve,” Martim Facada, lithium trader at trading house Traxys, said during a panel on September 20. “Once you have a forward curve you have the visibility of the next two, three, four years price of lithium and that obviously builds the trust and the visibility that the bank, trading house or any other investor needs to confidently say, ‘OK I’m going to put $100 million on this mine or $200 million on this plant.’”

Fastmarkets’ lithium prices underpin forward derivatives on the Chicago Mercantile Exchange, the London Metal Exchange and most recently, the Singapore Exchange (SGX).

The SGX launched its suite of battery raw materials derivatives on Monday, which includes lithium hydroxide and carbonate as well as cobalt metal and hydroxide, based on Fastmarkets’ benchmark prices.

Trades on its day of launch were concluded on cobalt metal, hydroxide and lithium carbonate.

>> If you’re looking to find out more about risk management solutions including futures contracts for cobalt and lithium, click here.

Transparency for new markets

But with Western nations looking to secure further supply in the coming decades to meet decarbonization goals and battery manufacturers looking to use different feedstocks due to prices for materials like lithium and nickel touching record highs this year, pricing transparency will need to be established on relatively young battery raw material markets.

Those markets include nickel mixed hydroxide precipitate (MHP), a precursor for nickel sulfate and a crucial ingredient in electric vehicle batteries. Fastmarkets is looking to launch a cif China, Japan, Korea nickel MHP price to meet demand for further transparency in that market.

Fastmarkets also launched its manganese sulfate 32% Mn min, battery grade, exw mainland China price at the start of September. The usage of manganese in a nickel-cobalt-manganese (NCM) battery could increase, if market participants look to shift the proportion nickel, cobalt and manganese from the traditional 8-1-1 chemistry in coming years.

Western markets will also have to turn to recycled NCM and lithium iron phosphate (LFP) batteries, also known as black mass, in order to hit carbon emission goals in the coming decades.

While battery recycling is a relatively new industry and will likely grow in the coming years as electric vehicles and their batteries come off the road, market participants are seeking pricing transparency already to attract investment.

>> Read more about Fastmarkets NewGen Battery Recycling Outlook here.

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