Risk outlook for battery raw materials: price dynamics, supply/demand imbalance and demand destruction

Surging prices for battery raw materials including lithium, cobalt, nickel and graphite, and the supply/demand imbalance from the lack of investment extraction and production were key topics from our recent risk outlook webinar

Following our recent risk outlook webinar, moderated by Davide Ghilotti, with Fastmarkets’ William Adams, Dalila Ouerghi and Battery Materials Review’s Matt Fernley discussing the battery raw materials market, we’ve summarised the key takeaways and insights from the discussion.

The webinar used Fastmarkets battery raw materials risk matrix as a backdrop to the conversation. You can view the risk matrix and access the full report here.

Changes to price dynamics

Going back as far as January 2021, and even earlier, we’ve seen lithium and other battery metal prices surging steadily on increased demand as battery makers and automakers have ramped up production and have been racing to secure supply.

Lithium prices

Lithium prices experienced the sharpest price rise in the last year, increasing overall by 400% in 2021. The price is supported by disruptive factors such as ongoing logistics bottlenecks, the slow restart of idle capacity, delayed start of new capacity, and an industry-wide shortage of skilled personnel in construction, production and maintenance across the spodumene sector in Western Australia.

All these factors have added to the fundamental tightness in the global lithium market over the past 18 months. Although we are seeing a slight dip in the lithium price, this is a temporary lapse rather than a signal of its flat-lining.

“I think it’s a temporary pullback,” says William Adams. “The pullback we’re seeing now is due to the slowdown we’ve seen in China because of the Covid lockdowns and the transport networks have been impacted as well. But these are temporary and the underlying bullish market fundamentals are still there.”

Cobalt benchmark price

Logistics issues have impacted this critical BRM, and there are more issues for those in long-term contracts. Participants that are not able to secure their long-term volumes due to logistics delays and increasing costs, or if demand has exceeded their initial expectations, have to enter the spot market.

Nickel price

The nickel price has seen a progressive rise as well. Physical premiums have been at an all-time high with supply chain constraints and tight availability adding to this background. The raw material has become more difficult to source in the current geopolitical environment, which has brought to light the importance of energy security and independence.

Graphite price

We have seen a similar increase here, with high energy costs and logistics constraints, as well as increased demand supporting these other factors.

Supply/demand imbalance

The supply/demand imbalance story has been building for the last two to three years. We saw a spike in BRM prices in 2018, and a fall in investment flowing into the sector.

“It’s fair to say that the sector hasn’t ever really recovered from that drop in investment,” says Matt Fernley. “As a result, we’re building up very substantial supply/demand imbalances. The difference between this cycle and last cycle is that last cycle the price rise was due to a supply situation. Now, the rapid increase in electric vehicle (EV) sales means the imbalance is coming from the demand-side.”

Fernley says that there is an obvious and substantial disconnect in the market, and EV sales growth is actually being constrained by the raw material availability in the market. While there is new supply coming into the market, it’s nowhere near enough to deal with the demand drivers, he says.

“In Battery Materials Review, we utilize a material-constrained EV forecast and one based on unconstrained raw material supply, which we think we could get to something like 38 million units of EV sales by 2025 if there was no constraint on raw materials availability,” says Fernley. “Unfortunately with supply as constrained as it is at the moment, I forecast that in 2025 we will sell only 50% of the EVs we could because of the raw material shortage.”

Idle supply and the impact of Covid-19

During the weaker market period of 2019 and 2020, some projects were closed down, but it has taken longer than expected for this idle supply to be reactivated. Western Australia is a prime example of how Covid-19 lockdowns and travel restrictions slowed BRM production, which heavily impacted the ability for spodumene concentrate projects to ramp up.

“This highlights how long it takes some of these projects to ramp up, and Covid and travel restrictions haven’t helped in the matter,” says William Adams.

Demand destruction is unlikely

Although logistics bottlenecks are stifling the supply chain of BRMs, and material prices have been going up, Fernley says he doesn’t believe we will see material demand destruction.

“Governments around the world have got so much invested in electric vehicles. I think governments and car companies will find ways to get around the rising cost of batteries, whether that is through something like offering batteries as a service, or introducing a contract leasing system for EVs,” says Fernley.

The actual amount of raw material available could be where we might see a slowdown in EV growth or a dampening of expectations. Technology might come to the rescue, in the form of direct lithium extraction (DLE) or other similar technologies that would speed up the process to get supply online.

To hear more expert insights from the webinar, you can listen to the full recording on-demand here.

Join us on June 27-29, 2022, in Phoenix for the Lithium Supply & Battery Raw Materials 2022 conference to hear more.

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