Over the past three months, a combination of higher demand expectations and further supply cutbacks has changed CRU’s 5-year balance views.
At first glance, the market balance could be interpreted as being at risk of entering a sustained deficit by 2022 – two years earlier than we originally thought – with this deficit rapidly accelerating into a “lithium cliff” scenario by the mid-2020s.
However, the reality is more nuanced. There remains ample new supply in the pipeline in the form of underused capacity, closed mines and brownfield expansions which will be accelerated as a result of an expected deficit. We believe that rising demand and an uptick in prices will stimulate the return of this supply in 2022-2023, keeping the market balanced over the next five years.
The lithium market needs price growth to stimulate new supply. However, we do not expect a price shock akin to what was seen in 2016-2018. At that time, supply growth came almost entirely from greenfield expansions which required very strong price stimuli to be accelerated – often up to 75% over marginal costs ($14 /kg LCE in practice). This time, new supply is likely to come from better capacity utilisation and reopening mines. We believe that prices below $11 /kg LCE are sufficient to stimulate this new supply – and much of this is profitable even at today’s price levels ($8.75/kg LCE).
EV forecast updated amid stronger OEM pledges
In the short-term, CRU’s electric vehicle forecast remains largely unchanged since November. We have downgraded our 2020 sales expectations of NEVs in China (BEV+PHEV) to 1.35 million units from 1.5 m units, and our forecast EV sales growth in North America and Europe remain conservative for now, to account for teething issues with building scale. More information on the impact of COVID-19 will be available in the April report.
Looking to the longer-term, CRU has updated its view on global battery electric vehicle (BEV) sales since November. We now expect that the global BEV market will grow to 7.5 m unit sales by 2025, compared to 6.7 m sales in our previous forecast. Global BEV sales were 1.95 m in 2019, implying a 2019-2025 CAGR of 25.2%.
The main driver of this increase has been an upgrade to manufacturing pledges from key OEMs. We still believe that the key element that is preventing the widespread adoption of BEVs is a fundamental lack of EV manufacturing capacity. Over the next 5 years we do not foresee a shortage of battery metals, refining capacity, cell manufacturing capacity, charging infrastructure or even consumer demand. Right now it’s all up to the OEMs. We believe that BEVs will be bought as quickly as they can be made in most cases.
CRU’s 5-year BEV forecast is derived mostly by considering manufacturing plans on a company-by-company basis. In the last few months, two key announcements have caused us to increase our forecast.
- VW Group has announced that it intends to hit its target of 1 million BEV sales worldwide 2 years earlier than expected, and now intends to reach 1.5 million BEV sales per year by 2025. The company’s flagship BEV, the VW ID.3, has faced software issues in recent months but the company still intends to hit 80,000 sales in 2020, rising to 100,000 in 2021. Up to 330,000 EVs will leave VW Group’s Zwickau assembly line each year from 2021 onwards.
- General Motors announced last week that it intends to spend over $20 billion in the next 5 years on the development of electric vehicles. The company also unveiled a new battery technology in development, the NCMA “ultium” battery, which offers improved energy density and charging time. General Motors also announced that they have upgraded their 2025 BEV sales target to 1mn per year, compared to around 150,000 per year today.
Electric vehicle market expectations are the single biggest source of risk and uncertainty in the lithium market. As a result of our demand upgrade, we now expect lithium demand to grow to 679,863 tonnes LCE by 2024, compared to 630,320 tonnes in our last report. We estimate that 2019 demand was 309,945 tonnes, meaning that we expect a 2019-2024 CAGR of 17%.
Production cutbacks continue as miners dash for cover
The downturn in the lithium market over the last 12 months has stimulated a wide range supply cutback measures, with most of these being in Australia. We have summarised these cutbacks below.
Most of these cutbacks were announced and enacted in the second half of last year in anticipation of prices crashing to below $10 /kg LCE. The key changes since November are as follows.
- Wesfarmers/SQM have deferred final investment decision for the Mt Holland project until Q1 2021. CRU originally expected the project to begin ramping up in 2021.
- Wodgina is now officially under care and maintenance.
- Pilbara Minerals has continued to moderate supply since Q3 of last year.
The “Lithium Cliff” is looming… or is it?
If one were to take a snapshot of current supply plans and expected demand it would appear that the lithium market is about to swing into a sustained deficit from 2022 onwards, ushering in the “lithium cliff” which has long been theorised by perpetual market bulls. We illustrate this in the chart below.
However, this is not our base case view and CRU urges caution when considering a supply-demand balance in isolation. If one extends the supply-demand balance for any commodity far enough into the future, taking only existing operating or committed supply, then one could construct a scenario where the market appears to be on the cusp of an extreme shortage.
A more nuanced method of analysis is required as supply will be more reactive and new sources of supply will enter the market. One must look at the supply pipeline as a whole, not just confirmed or operating projects. The extreme deficits shown in the chart above, do not account for ‘probable’ lithium projects – and even in a high demand scenario (1 m tonnes by 2025), there is enough supply pipeline to keep the market relatively well-supplied (assuming that a good portion of this supply comes online in a timely fashion).
This supply will not be stimulated until there is enough demand and price support to merit it. CRU’s current base case for the next 5 years is as follows.
- In 2020, we expect the market to remain well-supplied as the market works through overhanging stocks from previous years. Prices are expected to be rangebound.
- In 2021, we expect contract prices to begin to creep up as demand growth accelerates and market anticipations of future deficits begin to stimulate restart plans.
- In 2022, we expect prices to peak. By this stage, miners will have accelerated plans to increase supply, pushing back the “lithium cliff” to the late-2020s. A combination of better capacity-utilisation, mine restarts and brownfield expansions will keep the market well-supplied. More details on where we expect new supply to come from, on a project-by-project basis, will be available in our April report.
- By 2023, we expect prices to have returned to cost-driven levels ($8-9/kg LCE, $real 2018).
We are not on the cusp of another 2017-2018 price run
CRU believes that prices will need to increase in the mid-term in order to stimulate new supply. At first glance, this situation might appear to be similar to the price run and supply response that we saw in 2017-2019. Some industry participants expect that prices are likely to creep back up to 2017-2018 levels as the “new normal” (~$14/kg LCE in 2018, $real 2018).
However, again CRU urges caution. Today’s lithium market has changed radically compared to even a few years ago. Between 2015 and 2019, we estimate that over two thirds of all new supply came from the development of greenfield projects, as shown in the waterfall chart below.
By contrast, CRU expects that just 16% of new supply over the next 5 years will come from greenfield projects, with the much of the remaining 84% coming from better capacity utilisation at existing projects. This is illustrated in the waterfall chart below.
This distinction is extremely important when discussing price expectations. The 2015-2019 greenfield expansion in the lithium sector naturally required a very heavy price stimulus to bring on new supply, with contract prices temporarily reaching 75% over the marginal cost producer at times. By comparison, the supply response we will see in the coming years will not require as strong a price increase – and much of the additional supply could even come online at today’s prices, once the demand is there for it.
Consequently, we expect nominal contract prices to remain flat at $9/kg LCE over the next two years, before increasing to a peak of $10.4/kg LCE in 2022 (with prices peaking at $11/kg LCE in Q2 2022). From 2023 onwards, we expect prices to ease back to cost-driven levels once new supply is secured. All commodity markets are inherently cyclical, and lithium may need another high price cycle to stimulate another wave of greenfield expansions sometime in the future. Unless demand grows substantially faster than we expect, then sustained mid-teen prices ($real 2018) over the forecast period are highly unlikely.
