By Nicholas Way
There will be hiccups along the way, but lithium looks like it’s joining the pantheon of Australian mining success stories.
One interpretation of Donald Horne’s seminal 1964 tome, The Lucky Country, is that Australia’s good fortune derives from what we either dig up or grow. Think how the country rode the sheep’s back for decades, or how iron ore from Western Australia’s Pilbara region first sated Japan’s appetite – and now China’s – for steel. Today, in a world transitioning from fossil fuels to renewables, lithium is adding a fresh chapter to this ‘lucky’ narrative.
It’s a perfect storm. Going hand in glove with a world transitioning to electrical vehicles (EVs) – rechargeable batteries currently absorb about 80 per cent of the world’s lithium consumption – are renewed geopolitical concerns about access to critical minerals to avoid a reliance on China and, in Australia, a renewed focus on downstream processing.
But first to the supply side. According to the federal Department of Industry, Science and Resources’ March quarterly, Australia is the world’s largest lithium producer with 53 per cent of the market, and is the leading exporter. (Other key players are Chile and Argentina.) It predicts production to grow from 333,000 tonnes of lithium carbonate equivalent in
2021–22 (world production was 737,000 tonnes), to 431,000 tonnes in 2022–23. By 2027–28, Australia’s lithium carbonate equivalent tonnage will be double 2021–22 levels at 661,000 tonnes.
‘In terms of export earnings, they are forecast to more than triple – from $5.3 billion in 2021–22 to $18.6 billion. They are then expected to decline to $11.8 billion in 2024–25 in real terms, before picking up later in the decade to reach $19 billion by 2027–28,’ says the quarterly.
As the quarterly makes clear, more supply can be expected to come onto the market with high prices driving smaller, lesser-known projects around the world to speed up production. ‘Over a five-year outlook, key sources of added supply include China, Brazil, Canada, the Democratic Republic of the Congo, Mali and Zimbabwe.’ But none of this extra output is expected to usurp Australia’s role as the premier producer.
Despite growing supply, it will struggle to meet the world’s demand for lithium. The International Renewable Energy Agency puts it bluntly: ‘Lithium is critical to the energy transition. The lightest metal on Earth, it’s commonly used in rechargeable batteries for laptops, cellular phones and electric cars, as well as in ceramics and glass. Although sodium-based batteries are under development, it is likely that lithium will remain the metal of choice for the foreseeable future, as requirements are relatively independent of specific battery composition.’
Global management consultancy firm McKinsey & Company, which predicts that lithium demand will rise to about three to four million metric tonnes by 2030, does believe production will keep pace with the burgeoning lithium-ion battery industry. But it adds that satisfying the demand for lithium will not be a ‘trivial problem’, with this metal needed to produce virtually all traction batteries used in EVs, as well as consumer electronics.
It’s a viewed shared by Dublin-based global market research firm Research and Markets. Predicting global demand to reach US$18.99 billion by 2030, Research and Markets believes that ‘rising investments in lithium mining and related technologies are projected to remain a key trend in the market … as demand accelerates, owing to its application in batteries. Over the past decade, the rise in usage of lithium-ion battery storage has led to a decline in prices by more than 80 per cent, leading to enhanced energy storage, and paving the way for EVs to be commercially viable.’
Just how buoyant the demand for EVs has become and, consequently, its impact on the lithium price, is highlighted in an S&P Global Commodity Insights report. It says that EV sales are racing past expectations, citing the following numbers:
EV sales grew 102 per cent in 2021 to six million units globally – an increase of 38 per cent year-over-year.
S&P estimates that 6.5 million EV units were sold in 2022, and 10.5 million will be sold by 2025.
EVs accounted for almost 20 per cent of recent new car sales in China.
EV sales represent more than 25 per cent of European Union new car sales.
Global EV sales are to increase ninefold between 2020 and 2030 – or from two million units to more than 27 million units (nearly 30 per cent of global market share).
By 2040, EV sales expected to overtake petrol-powered vehicles.
The verdict is in: EVs are the future, and lithium is in the front seat on this journey to a renewable future. But that’s not to say there won’t be bumps along the way. Investors discovered just how bumpy the journey is after the lithium carbonate price – which skyrocketed in 2021 and 2022, reaching nearly 600,000 yuan (A$130,151) a tonne in November last year – suddenly headed south. Spooked by China ending its policy of subsidising EV sales from 1 January 2023, the price plummeted to an April low of 172,000 yuan (A$37,310) – a 70 per cent drop. Currently, it is trading at around 300,000 yuan (A$65,075) – a 74 per cent gain on its April low, with Citigroup attributing the rebound to improved market sentiment, demand from physical traders, recovering EV sales, and lower inventories in the supply chain.
That’s the global macro picture. On the home front, lithium remains a headline story, with opportunities aplenty for investors. This list is far from complete, but stocks that have enjoyed a price turnaround since the lithium price started to recover include Pilbara Minerals (ASX: PLS), Allkem (ASX: AKE), Liontown Resources
(ASX: LTR), and Patriot Battery Metals (ASX: PMT). A newcomer to the field, Evergreen Lithium, which listed on 11 April, has been trading at a healthy premium to its 25-cent issue price.
Liontown deserves a special mention. When the giant US group Albemarle Corporation made a $2.50-a-share bid for Liontown in March, valuing it at $5.2 billion, the Liontown board could not reject the offer quickly enough, saying it ‘substantially undervalued the company’, with its Kathleen Valley project predicted to become Australia’s biggest lithium mine. Yet, the offer price represented a 63.9 per cent premium to Liontown’s last close, and its shares immediately climbed 59 per cent to $2.42. It is currently trading at around $2.70.
Two other consequences have flowed from this audacious bid. First, other miners’ share prices have benefited as speculation surrounds where Albemarle might look next, and Liontown Managing Director and CEO Tony Ottaviano has publicly confirmed that the banks have put debt funding for lithium projects on the table, having been conspicuously absent in the previous lithium boom between 2017 and 2019.
Another difference marks this ‘lithium rush’. There is growing impetus, both in Canberra and other Western countries, to break China’s dominance of the global processing of critical minerals (about 60 per cent of lithium and cobalt, for example), with the United States, in particular, looking to secure long-term agreements to get access to these minerals. The Biden Administration has also committed US$369 billion via the Inflation Reduction Act to hasten the move towards renewables in a move that can only further underpin the demand for critical minerals.
Canberra needs no reminding about how China is willing to ‘weaponise’ supply chains, as it currently winds back trade sanctions. Certainly, it is supportive of Western Australia’s push into processing lithium hydroxide – it became state government policy just before COVID struck – although federal tax incentives and a reserve policy are probably needed to give it greater impetus.
But the processing footprint made in the West can only deepen, with three of the world’s largest lithium producers teaming up with local players. By the end of 2023, it’s expected that they will be producing about 10 per cent of the world’s supply of lithium hydroxide, a figure expected to double by 2028. Lucky Western Australia. Lucky Australia.