Battery materials outlook

By Gavin Wendt, Founding Director and Senior Resource Analyst, MineLife

Commodity markets continue to be defined by near-term pessimism, balanced against longer-term optimism. The prevailing negatives are inflation, interest rates and recession, as well as a sluggish China recovery. The longer-term positives are based around growth in alternative energy, and the corresponding increase in commodity demand and production. 

The inevitable recovery in commodity pricing will be more pronounced, as record deployments of alternative energy technologies, such as solar and batteries, will drive demand for critical minerals.

Joe Biden’s Inflation Reduction Act authorises almost $400 billion for investments in energy projects and climate change, including the mining of critical minerals. When this is combined with Biden’s $1-trillion investment law – which includes incentives for sourcing dozens of minerals – and the 27 February announcement from the White House Presidential Waiver of Statutory Requirements, it appears a mining boom is close at hand.

Surging demand

The market for critical minerals used in electric vehicles (EVs), solar panels and wind turbines has doubled over the past five years, reaching $320 billion during 2022. The International Energy Agency’s (IEA’s) inaugural Critical Minerals Market Review shows that, between 2017 and 2022, the energy sector has been the main factor behind a tripling in overall demand for lithium, as well as the 70 per cent jump in demand for cobalt, and the 40 per cent rise in nickel demand.

As a result, energy transition minerals, which used to be a small segment of the market, are now moving to be centrestage in the mining and metals industry. The market has responded, with investment in critical minerals development rising 30 per cent last year, led by lithium with a 50 per cent jump in investments. Likewise, exploration spending rose by 20 per cent during 2022, again driven by record growth in lithium exploration, particularly in Canada and Australia, where year-on-year growth of 40 per cent was recorded.

Lithium carbonate prices have been steadily increasing over the past two years. In 2021, prices multiplied fourfold to fivefold, and continued to rise throughout 2022, nearly doubling between 1 January 2022 and 1 January 2023. At the beginning of 2023, lithium prices stood six times above their average over the 2015–20 period. In contrast to nickel and lithium, manganese prices have been relatively stable.

One reason for the increase in prices for lithium, nickel and cobalt was the insufficient supply compared to demand in 2021. Although nickel and cobalt supply surpassed demand in 2022, this was not the case for lithium, causing its price to rise more strongly over the year. Between January and March 2023, lithium prices dropped 20 per cent, returning to their late 2022 level.

Exponential EV sales growth

Battery metals will benefit from electric car markets that are seeing exponential growth, with sales exceeding 10 million during 2022. A total of 14 per cent of all new cars sold were electric in 2022, up from around nine per cent in 2021, and less than five per cent in 2020 – with three markets dominating global sales. China was the frontrunner once again, accounting for around 60 per cent of global EV sales. More than half of the EVs on roads worldwide are now in China, and the country has already exceeded its 2025 target for new EV sales.

In Europe, the second-largest market, EV sales increased by more than 15 per cent in 2022, meaning that more than one in every five cars sold was electric. EV sales in the United States – the third-largest market – increased 55 per cent in 2022, reaching a sales share of eight per cent.

Encouragingly, early indications from first quarter sales of 2023 point to an upbeat market, supported by cost declines, as well as by strengthened policy support in key markets such as the United States. Globally, the IEA’s current estimate is for nearly 14 million EVs to be sold in 2023, building on the more than 2.3 million already sold in the first quarter of the year. This represents a 35 per cent increase in EV sales in 2023 compared to 2022, and EV sales in the first three months of 2023 have shown strong signs of growth compared to the same period in 2022.

In the United States, more than 320,000 EVs were sold in the first quarter of 2023 – 60 per cent more than over the same period last year. The IEA’s current expectation is for this growth to be sustained throughout the year, with EV sales reaching over 1.5 million in 2023, bringing the EV sales share in the United States up to around 12 per cent in 2023.

Significantly, the European Union (EU) and the United States have both passed legislation to match their electrification ambitions. The EU adopted new carbon dioxide standards for cars and vans that are aligned with the 2030 goals set out in the Fit for 55 package. In the United States, the Inflation Reduction Act, combined with adoption of California’s Advanced Clean Cars II rule by a number of states, could deliver a 50 per cent market share for EVs in 2030, in line with the national target. The implementation of the recently proposed emissions standards from the US Environmental Protection Agency is also set to further increase this share.

Battery manufacturing boom

Battery metals will also benefit from an ongoing expansion in battery manufacturing capacity, directly linked to the outlook for EVs. As of March 2023, announcements on battery manufacturing capacity delivered by 2030 are more than sufficient to meet the demand implied by government pledges, and would even be able to cover the demand for EVs in the net zero emissions by the 2050 scenario. It is therefore possible that higher shares of sales are achievable for EVs than those anticipated on the basis of current government policy and national targets.

Global EV battery demand increased by about 65 per cent in 2022, reaching around 550 gigawatt hours – about the same level as EV battery production. The lithium-ion automotive battery manufacturing capacity in 2022 was roughly 1.5 terawatt hours for the year, implying a utilisation rate of around 35 per cent compared to about 43 per cent in 2021. Battery demand is set to increase significantly by 2030, reaching over three terawatt hours.

To meet that demand, more than 50 gigafactories (each with 35 gigawatt hours of annual production capacity), in addition to today’s battery production capacity, would be needed by 2030. This increases to close to 65 new gigafactories to meet 2030 demand. According to Benchmark Mineral Intelligence (as of March 2023), the announced battery production capacity by private companies for EVs in 2030 amounts to 6.8 terawatt hours.

Supply roadblocks

Far more needs to be done to ensure supply chains for critical minerals – such as lithium, cobalt, nickel and copper, as well as platinum, manganese and various rare earth minerals – are secure and sustainable. There is also a need to diversify the sources of supply away from its current concentration in a handful of countries. The Democratic Republic of the Congo dominates cobalt supply, while China holds half of planned lithium chemical plants, and Indonesia represents nearly 90 per cent of planned nickel-refining facilities. Any project delays and technology-specific shortfalls could undermine both the pace and cost of the energy transition, pushing commodity prices higher.

China maintains about one-third of the world’s rare earth reserves, a key component in the production of EV batteries and electronics. China also hosts at least 85 per cent of the world’s capacity to process rare earths into material that manufacturers can use – a capability that other countries want to develop. China has been the go-to supplier for companies because it is able to export processed minerals at a lower cost than other countries.

If rare earths prices rise as restrictions take hold, however, companies in the West would have another reason to shift supply chains, and make it more economical to boost output in Japan, Canada, the United States, or elsewhere. China’s previous efforts to restrict the sale of rare earths have only diminished its market share as other countries work to secure supplies of the metals that aren’t controlled by China. China first introduced an export licensing system for rare earths during the 1990s, while also gradually ramping up taxes that squeezed companies in Japan and elsewhere that relied on Chinese supplies.

The big shift, however, happened in 2010, when Beijing temporary halted exports to Japan in reaction to a collision between a Chinese fishing boat and the Japanese Coast Guard near islands claimed by both countries. That incident set off a race to find alternatives to supplies from China. Output in Australia and the United States subsequently increased, pushing down China’s share of mining output to 70 per cent of global supply in 2022 from a peak of 98 per cent in 2010, based on US Geological Survey data.

China’s recent decision to restrict exports of strategic metals – gallium and germanium – from 1 August is causing more angst. China accounted for about 98 per cent of the world’s gallium production in 2022, estimated at 430,000 kilograms in 2021. China was also the world’s leading producer of germanium in 2022, with the country controlling 68 per cent of global refinery production – estimated at 140,000 kilograms in 2021, according to the US Geological Survey – with the rest of processing spread across Europe and North America.

Gallium is a soft silvery metal that is similar to aluminium. About 95 per cent of all gallium produced is used to make gallium arsenide, a compound used in microwave and infrared circuits, semiconductors, and blue and violet LEDs. The compound gallium nitride is used as a semiconductor in Blu-ray technology, mobile phones and pressure sensors for touch switches. There are no substitutes for its use in some products, and gallium is not currently recyclable. Germanium, a silvery-white metal, is used in the manufacturing of fibre optics to transfer data and information, as well as high-speed chips and infrared radiation.

Aside from China, it’s just taking longer to commission new mines. Quoting from a recent Bloomberg article, ‘There’s a huge crisis,’ says Doug Kirwin – one of the earliest geologists to work at the deposit that became Oyu Tolgoi, or Turquoise Hill, named after the area’s rocks that are stained with oxidised copper. ‘There’s no way that we can supply the amount of copper in the next 10 years to drive the energy transition and carbon zero. It’s not going to happen,’ adds Kirwin, now an independent consulting geologist. ‘There’s just not enough copper deposits being found or developed.’

Analysts at Wood Mackenzie estimate we will be short about six million tonnes of copper by the next decade, meaning 12 new Oyu Tolgois need to come online within that period. But they aren’t, as there are simply not enough new mines, much less enough large ones. The result is a gap, as BloombergNEF estimates that appetite for refined copper will grow by 53 per cent by 2040, but mine supply will climb by only 16 per cent.

We’re also approaching a supply crunch in the global lithium market toward the end of this decade as EV demand ramps up. Raw materials loom as a bottleneck, with about 300 factories that can produce batteries for EVs being developed globally, and about 59 new lithium mines and plants necessary, according to Benchmark Intelligence. A gigafactory can be built in two to five years, a refinery can be built in two, but the mines needed upstream of them take between five and 25 years to develop.

Junior equity excitement

Junior equities are in the ideal position to benefit from the energy transition. Junior companies are typically far more nimble than the sector heavyweights in terms of adaptation, and being able to acquire and efficiently evaluate exploration projects that are relevant to new commodity demand trends. We’ve seen this already with respect to key Australian and North American junior equity plays that have been successful in the battery metals space.

One of the hottest investment destinations right now for junior and larger companies alike is the James Bay region of Quebec, Canada. Quebec represents a highly attractive investment destination for battery metals production due to its supportive resource development sector, access to skilled labour, and its proximity to the emerging European and North American EV markets. Canada also has free trade agreements with the United States and the EU.

The James Bay region hosts projects that include Allkem’s (ASX, TSX: AKE) James Bay deposit, a mine capable of producing 321,000 tonnes of spodumene concentrate per year; and the Corvette project of Patriot Battery Metals (ASX: PMT, TSX-V: PMET), a company chaired by former Pilbara Minerals (ASX: PLS) boss Ken Brinsden.

One of the key themes in the junior company space is the growing partnership with car makers. Vehicle manufacturers are boosting their upstream investments and supply contracts in order to secure enough battery metals for EV production. It used to be that junior mining companies would only be acquired by majors and mid-tiers, but that’s no longer the case. As vehicle manufacturers and battery manufacturers become more desperate for battery metals, we could be looking at a monumental shift in the way that juniors are valued.

One of the stand-out performers in the battery metals space, and a great example of what is possible, is Western Australian lithium company Liontown Resources (ASX: LTR), which has risen from a low of about A$0.02 to approximately A$3 over the past few years. Its Kathleen Valley project will be one of the world’s largest lithium mines, supplying around 500,000 tonnes of six per cent lithium oxide concentrate per year when it comes onstream in 2024. Crucially, it has binding offtake agreements with Tesla, Ford and LG Energy Solutions, and A$300 million in project funding from Ford.

Conclusion

Battery metals will continue to increase in profile due to a combination of growing demand, constrained supply, and geopolitical risk factors. A robust pricing environment is likely to prevail and to assist in incentivising new production. 

Nevertheless, financing challenges are likely to remain, meaning end-user involvement in project developments will be crucial. 

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