Fears that electric vehicle growth might be stalled by limitations in the supply of lithium for lithium-ion batteries have been significantly undercut by a new report from Morgan Stanley that sees long-term surplus for the metal.
At the heart of the estimate is Morgan Stanley's projection that a new project in Chile from miner SQM, and to a lesser degree expansions by a separate Chilean miner, Albemarle, will add 200,000 metric tons per year to that country's lithium output. Other new sources elsewhere in the world also are cited by the Morgan Stanley report.
The changes in projected supply/demand are stark. For example, Morgan Stanley estimates that the lithium market in 2018 will be essentially in balance, leaning to a small deficit, after being in deficits in 2016 and 2017 of roughly 12,000 tons each year. But even with surging demand coming primarily from batteries for electric vehicles, the added supply is expected to put the market balance into a surplus in 2019 of approximately 62,000 tonnes, with that figure rising to 190,000 tonnes by 2022 and 2023. The surplus narrows after that but is still seen out of balance by almost 150,000 tonnes in 2025.
From 2019-2025, Morgan Stanley forecasts cumuluative supply of 3.9 million metric tons, up 35% from 2.9 million tons.
Prices to take a sharp drop
The pricing impact, according to Morgan Stanley, is that the Chilean contract price of lithium carbonate will decline from an estimated peak this year of $13,375 per ton to $7,322 in 2021, rising back to $8,155 in 2025. The report notes, however, that lithium prices are at present "opaque."
The new Chilean sources are relatively cheap to produce. Morgan Stanley estimates the cost at less than $5,000 per ton, and "it's therefore set to flatten the cost curve and drive higher-cost tonnes out of the market."
The projected increase in supply is what long-term students of commodity markets will tell you always happens: prices get high, and supplies are incentivized to come to market. What is not the case with lithium, however, is conventional commodity market wisdom that demand decreases due to price destruction and engineering around the expensive component.
The Morgan Stanley model assumes increasing EV penetration, and relatively steady use of lithium as more electric vehicles are sold into the market. It sees annual growth in lithium demand as low as 9.1% and as high as 17.9% between now and 2025; the 17.9% figure is for that final year of the model.
According to Morgan Stanley, the amount of lithium to be used for every additional 1% of electric vehicle penetration in the market remains remarkably steady. It is estimated at 30,000 tons per 1% of EV penetration in 2018, and is at 32,000 by 2025. However, it does decline to 26,000 and 27,000 tons, respectively, in 2021 and 2022, before rising to the 32,000 ton level.
EV penetration: 9%
The lithium projections are based on Morgan Stanley's company-wide estimate that electric vehicles will have 9% global market penetration by 2025, up from 1.6% in 2018.
The increase in supply could get another boost if other technologies are perfected. New lithium supplies come from both hardrock mining and brine extraction. In the case of brine extraction, "improvements are being made to the process that are likely to enable improved recoveries," the report said.
On a recent visit to China, Morgan Stanley analysts said they met with battery makers who said output from that country--which now has a larger market share than Chile, but will lose that to Chile with its new projects---is "improving in quality and quantity, as extraction and processing techniques evolve. We see China's growing potential output as a key risk to our supply-demand and price outlook to 2025."