Energizing the Electric Future: How Surging Lithium Prices Fuel Valuations, M&A Deals, and Investor Returns
Lithium Market Analysis
The lithium market is a dynamic and growing market with a strong outlook. The demand for lithium is expected to grow significantly in the coming years, driven by the increasing adoption of electric vehicles (EVs) and grid-scale battery storage systems.
Lithium Demand and Supply Dynamics
Demand for lithium is expected to grow at a CAGR of 24.6% from 2021 to 2026, driven by the increasing adoption of EVs and energy storage systems. In 2021, 91% of lithium demand came from battery-based applications, with passenger EVs accounting for 77% of total battery-based demand. By 2026, 94% of lithium demand is expected to come from battery-based applications, with passenger EVs accounting for 78% of total battery-based demand.
Supply of lithium is expected to grow at a CAGR of 23.3% from 2021 to 2026, but this is expected to fall short of demand growth. As a result, the lithium market is expected to see a persistent deficit of 3-4% between 2023 and 2026.
The world’s топ 10 countries for lithium reserves and resources have a combined 322.2 million tonnes of lithium oxide (Li2O), which equates to roughly 795 million tonnes of LCE. The reserves and resources of three of the largest four currently producing countries of Australia, Chile and Argentina make up a combined 231 million tonnes of LCE.
Industry Valuations Reflect Too Conservative a Lithium Price
In determining our valuations and price targets weighed against observed development risk multiples, we generally find that the market is discounting a long-term lithium carbonate equivalent (“LCE”) price of approximately US$25,000/tonne, in part because industry generally uses the three-year trailing average price (which as of December 2022 was US$25,830/tonne LCE) to evaluate cash flow, and in part because of expectations of a pullback from the dramatic recent run-up in prices to as high as the US$70,000/tonne LCE level. As it becomes evident that stronger for longer prices are here to stay, and the trailing three-year average adjusts upward, we expect that the price used to project cash flows and value projects will also increase. In our view, this presents a compelling reason to expect share price appreciation, ongoing M&A, and shareholder returns.
The price of lithium carbonate and lithium hydroxide, two key precursors to lithium-ion batteries, saw significant increases in 2022. The spot price of lithium carbonate nearly tripled, increasing by 185% (Exhibit 1), while the spot price of lithium hydroxide prices increased by 178% (Exhibit 2) from the year before.
Factors Driving Price Increases
The price increases were largely driven by a marginal spot demand increase caused by a government policy-induced increase in the production and sale of battery packs for light commercial electric vehicles (“EV”) in China. This policy led to a surge in light commercial EV sales in China, with the segment’s share growing from just 1% of all light commercial vehicle sales to 10% in two years. China has the largest light commercial vehicle market in the world according to Bloomberg NEF, and medium and heavy commercial EVs in China are also gaining traction. Additionally, the growing commercial adoption of Lithium-Iron-Phosphate batteries, which are less expensive (albeit also less energy dense) than lithium-ion batteries, is potentially adding to aggregate demand.
Sustainability of Lithium Prices
There has been debate about the sustainability of lithium prices given the recent run-up. Some analysts have called for a significant price drop in 2023. However, we believe that prices will remain robust in the near term, driven by several factors:
- Strong demand from the EV and battery storage markets: The demand for lithium is expected to grow significantly in the coming years, driven by the increasing adoption of EVs and energy storage systems.
- Government policies to support EV adoption: Governments around the world are implementing policies to support the adoption of EVs, including subsidies, tax breaks, and investments in charging infrastructure. These policies are likely to continue to drive demand for lithium.
Limited supply growth: Lithium supply is expected to increase in 2023, but it is not expected to keep pace with demand growth. This could lead to a supply deficit, which would put upward pressure on prices.
Impact of Higher Lithium Prices on Battery Prices
We believe that higher lithium prices will not necessarily drive much higher battery prices or significantly dent demand. There are a few reasons for this:
- Battery pack prices have already been declining: Battery pack prices have been declining rapidly in recent years, even as lithium prices have increased. This is due to economies of scale and technological advancements.
- Lithium is a relatively small component of battery pack costs: Lithium is a relatively small component of battery pack costs, accounting for only about 8% of the total cost. As a result, even a significant increase in lithium prices is unlikely to have a major impact on battery pack prices.
Opportunities for Americas-based Lithium Projects
North America is in particular moving to rapidly develop its lithium production capacity. This is creating an opportunity for Americas-based lithium projects to meet burgeoning regional demand. This is the reason, for instance, that Canada has begun to take a nationalist stance with respect to lithium supplies.
Risks to the Outlook
There are a few risks to our positive outlook for the lithium market:
- Government policies or taxes on internal combustion fuels: If governments do not implement policies or taxes to make EVs more affordable, demand for lithium could fall short of projections.
- Global COVID wave: Another global COVID wave could disrupt the supply chain and dampen demand for lithium.
We believe that the market is discounting a long-term LCE price of approximately US$25,000/tonne. However, we expect prices to remain elevated (i.e., above US$50,000/tonne) for the foreseeable future given supply and demand dynamics. This could have a significant impact on valuations, M&A, and investor returns.
Key Drivers of Demand Growth
- Batteries: Battery demand is expected to grow at a CAGR of 29.3%, driven by the increasing demand for EVs. Passenger EVs are expected to account for the majority of battery demand growth, with a CAGR of 32%.
- Non-battery applications: Non-battery demand is expected to grow at a CAGR of 1.4%.
Factors Supporting Continued Demand Growth
- Global climate goals: The adoption of EVs is a key focus of international decarbonization efforts. The International Energy Agency (IEA) estimates that EV adoption will grow at a CAGR of 27% from 2020 to 2030.
Historical and Projected Demand Breakdown
- 2017: Battery-based applications accounted for 47% of total lithium demand, with passenger EVs accounting for 33% of total battery-based demand.
- 2021: Battery-based applications accounted for 76% of total lithium demand, with passenger EVs accounting for 70% of total battery-based demand.
- 2026 (Projected): Battery-based applications are expected to account for 91% of total lithium demand, with passenger EVs accounting for 77% of total battery-based demand.
- Global Supply Sources: In 2021, 50% of global lithium chemical supply (in lithium carbonate equivalent (LCE) terms) came from Australia, 32% came from Latin America (mainly Argentina and Chile), and the rest of the supply came from China, North America, and other countries.
- Largest Producing Companies: The three largest producing companies in 2021, controlling 47% of global supply, were Albemarle Corp. (ALB-NYSE, NR) with 21% of global production, Sociedad Química y Minera de Chile (SQM-NYSE, NR) with 18%, and Pilbara Minerals Ltd. (PLS-ASX, NR) with 8% of global production.
- Production Sources: In 2021, 48% of global lithium chemical supply came from brine sources; by 2026, that amount is estimated to fall to 35.5%, with 64.5% coming from conventional hard rock sources and 1.0% coming from emerging clay sources.
- China’s EV Market: China remains a robust driver of the EV transition, representing half of global passenger EV sales in 2021. Despite a weaker economic environment, passenger EV sales in China were up marginally at 0.4% month-over-month in October, relative to overall auto sales that were down 4.6% over the same period. China is expected to continue dominating global EV sales, maintaining a 50-55% market share (Exhibit 6), despite slowing to a 2022E through to 2026E CAGR of 32% (from a 2017A to 2021A CAGR of 57%).
- Factors Driving Demand: Demand for lithium in battery applications is expected to remain strong owing to a mix of real consumer demand for differentiated products (i.e., the perceived premium and convenience of home/work charging of battery EVs), as well as from policy-induced demand that seeks to reduce the cost of passenger EVs relative to internal combustion engines, due to global mandates for an end to internal combustion engine vehicle sales (in Europe by 2030, Canada by 2035, US by 2035, etc.).
Lithium Supply Growth Projections
The supply of lithium raw materials and total lithium chemicals is projected to grow at a compound annual growth rate (CAGR) of 22.9% and 23.3%, respectively, between 2021 and 2026. This growth is expected to be driven by the increasing demand for lithium, which is forecast to grow at a CAGR of 24.6% over the same period.
Regional Supply Growth
On a regional basis, North America is expected to see the highest supply growth CAGR, at 25.3%, between 2021 and 2026. This growth is being driven by the development of new lithium projects in the region, as well as the increasing demand from US-based EV and battery manufacturers. Latin America is expected to see the second-highest supply growth CAGR, at 20.2%, followed by Australia (18.6%) and China (15.3%).
North America's Catch-Up
The strong supply growth in North America is expected to help the region catch up to Europe and China, which are currently the two largest lithium-producing regions in the world. By 2026, North America is expected to account for 20% of global lithium supply, up from 12% in 2021.
Lithium Supply-Demand Balance and Price Forecast
The global market for lithium chemicals was in balance until 2019/2020, when a large surplus emerged due to pandemic-related economic shutdowns and the global recession (Exhibit 9). As the global economy recovered in 2021, the lithium market experienced a modest deficit of 2.2%, which deepened to 3.2% in 2022. While this deficit was not substantial, it led to a significant increase in prices, from an average of US$13,313/tonne LCE (CIF Asia) in 2021 to an average of US$51,125/tonne LCE (peaking at US$62,500/tonne in December) in 2022.
In 2023, a small surplus of 0.4% is projected, partly due to the completion of a A$300M expansion at the Pilangoora mine, the fourth-largest producer globally, which will boost output by over 17% in late 2023. Beyond 2023, persistent supply deficits of 3-4% are anticipated until 2026.
The rapid price increase in 2022 was primarily attributed to a surge in marginal spot demand for light commercial vehicle battery pack production and sales in China, which is largely supplied from overseas. However, as previously mentioned, we believe that the majority of the market was being supplied by long-term contracts at around the US$38,000/tonne LCE level in mid-2022. Therefore, we consider the lithium price forecasts presented below to be reasonable estimates under the assumption of small, persistent supply deficits.
Lithium Supply Costs
In 2022, the average weighted total cash cost of production for lithium across approximately 94% of total sector production is estimated to be US$4,846/tonne lithium carbonate equivalent (LCE), or US$3,275/tonne LCE excluding royalties (taxes, carried interests, private or government royalties) at constant 2021 USD dollars (Exhibit 10).
Lithium Production Costs and Reserves
Excluding royalties, the lowest-cost LCE production comes from the aggregate of spodumene concentrate production from Australia’s hard rock mines, which produce at an average cash cost of US$2,058/tonne LCE. These mines include Wodinga (Albemarle 60%, Mineral Resources Ltd. 40%), Greenbushes (Albemarle 49%, Tianqi Lithium 26.01%, IGO 24.99%), Pilangoora (Pilbara 100%), and Mt. Cattlin (Allkem Ltd. 100%).
Lithium carbonate production is generally more expensive, with an average cash cost of US$4,616/tonne LCE. The highest-cost LCE production is from lithium hydroxide production, which averages US$6,658/tonne LCE. This is due to the additional processing required to produce lithium hydroxide from either spodumene concentrates or lithium carbonates.
Globally, royalties account for an average of 32% of total cash costs. However, royalties vary by region and product category. Chile has the highest royalty rates, with royalties accounting for 43% of total cash costs for lithium production. China, Australia, Argentina, and Brazil have lower royalty rates, with royalties accounting for 30%, 21%, 16%, and 5% of total cash costs, respectively.
Zimbabwe has the largest lithium reserves and resources, with the Bikita property reportedly having 116.2 million tonnes of lithium oxide (Li2O). Argentina is the second-largest reserve holder, with a total of 50.4 million tonnes Li2O, followed by Bolivia’s Uyuni Salt Flat with 39 million tonnes Li2O, the United States with 36.2 million tonnes Li2O, Chile with 25.4 million tonnes Li2O, and Canada with 18.7 million tonnes Li2O.
The top 10 countries for lithium reserves and resources have a combined 322.2 million tonnes Li2O, which is equivalent to roughly 795 million tonnes of LCE. The reserves and resources of three of the four largest currently producing countries (Australia, Chile, and Argentina) make up a combined 231 million tonnes of LCE. China, despite being the third-largest producer, does not make the top 10 countries for lithium reserves and resources.
Canada has the world’s sixth-largest reserves and resources at 18.7 million tonnes Li2O (or 46.1 million tonnes LCE), including the western prairie petro-brines which account for 66.4% of its total. The United States is in fourth place among the top ten with 36.2 million tonnes of Li2O, but well over half of that is from lithium clays that are not yet in production.
Lithium production costs vary depending on the type of lithium being produced and the location of the mine. Hard rock mines generally have lower production costs than brine mines. Lithium hydroxide production is the most expensive type of lithium production. Lithium reserves are concentrated in a few countries, with Zimbabwe, Argentina, and Bolivia having the largest reserves.
Important Note on Reserves and Resources
It is crucial to note that the stated lithium reserves and resources include both conventional and unconventional sources. Conventional sources are those that have been assessed to be economically feasible to extract, while unconventional sources are those that have not yet been evaluated for their economic viability. As a result, the actual amount of lithium that can be extracted from unconventional sources is uncertain and cannot be guaranteed.
According to S&P Global Market Intelligence, the top 10 countries for lithium reserves and resources hold a combined total of 322.2 million tonnes of lithium oxide (Li2O), which is equivalent to roughly 795 million tonnes of LCE. Of this, 231 million tonnes of LCE are contained within the reserves and resources of the three largest currently producing countries (Australia, Chile, and Argentina).
The vast majority of lithium reserves (254 million tonnes of Li2O) are held within brines, while the remaining 68 million tonnes of Li2O are found within hard rock deposits. Brines are naturally occurring salty lakes that contain lithium salts, while hard rock deposits are mined from the Earth’s crust.
The cost of extracting lithium from brines is generally lower than the cost of extracting it from hard rock deposits. However, brines are also more susceptible to fluctuations in lithium prices, as the cost of extracting lithium from brines is directly related to the price of water.
The development of new extraction technologies, such as direct lithium extraction (DLE), has the potential to reduce the cost of extracting lithium from brines. DLE is a novel process that uses solvents to extract lithium from brines without the need for evaporation.