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  • James McKay

Levitating lithium: how the turbo could lose its charge

Updated: Oct 16, 2019


It's official: the lithium rush has begun in earnest. The world's softest metal was easily the most talked about in the commodities space over 2017, primarily due to the expansion of Lithium-ion demand from the electric vehicle (EV) market. Global EV sales surpassed the 1 million mark by November in 2017 according to EV sales tracker, an increase of 55% over the same period in 2016.

In a year in which Tesla's Elon Musk himself came to embody the arrival of the new electric orthodoxy, it was easy to forget that the US is but one player of many in a thriving market for EVs. Indeed, according to an International Energy Agency report, China is now by far the largest EV market ahead of the US and the European Union; a fact reflected in the huge output of 6.7 billion EV batteries from Chinese manufacturers in the first eight months of 2017, up 51% from the year-earlier.

Fig. 1 : Evolution of the global electric car stock, 2010-16 [PHEV =Plug-in hybrid electric vehicles; BEV = Battery electric vehicles]


Source: International Energy Agency - Global EV Outlook 2017

Indeed, according to Bloomberg New Energy Finance, global battery-making capacity is set to double by 2021 to more than 278 gigawatt-hours per year, and cars are also expected to surpass consumer electronics as the leading source of lithium demand within the next five years. At the same time, the reports of supply chain stress from this ramping up of battery grade lithium carbonate and lithium hydroxide demand overloading Chinese battery manufacturing plants, only serves to reinforce this picture.

Fig. 2 : Cars to eclipse consumer electronics as the biggest user of lithium-ion batteries


Source: Bloomberg New Energy Finance (used with permission)

However, it is precisely because of the convergence of these bullish signposts and virtual universal optimism that there is no better time to explore possible risk factors that could come to bear on lithium's supply and demand profile–and by extension its spot price per tonne–over the medium to long-term. Here we take a brief look at several, roughly classified into three categories: alternative energy sources, subsidy reductions, and the commodities cycle.

Alternative energy source innovation

Lithium-ion (Li-ion) technology derives its name from the chemical ion exchange using lithium ions, but Li-ion batteries actually contain significant quantities of other metals including cobalt, nickel, and aluminium. Although lithium remains a key ingredient, it may have already peaked in terms of its role in battery chemistry, and extensive R&D is being undertaken to replace it with elements that are more abundant and less costly.

Any examination of alternative energy sources to lithium in batteries, however, must be prefaced by an acknowledgement of the considerable media hype that often surrounds research studies. This is done in order to attract venture capital to fund research projects, and universities continue publishing papers about battery breakthroughs to lock in government funding while private companies reference research papers to appease investors and boost their own stock value. Nevertheless, there are potential alternatives worthy of a mention.

Manganese

Already a critical metal in the production of steel, the importance of manganese as a Li-ion battery component has largely gone unnoticed due to the spot-price surges seen in cobalt and lithium. However, manganese's potential to displace lithium lies in the form of a newer battery technology, known as the lithiated manganese oxide battery (LMD), which use 61% of manganese in its mix and only 4% lithium. The LMDs have numerous benefits, including higher power output, thermal stability, and improved safety compared to Li-ion batteries. LMDs are already in production, and are currently used in cheaper electric cars like the Chevy Volt and Nissan Leaf, which should find a broader appeal in the budding clean energy revolution than the narrower luxury-segment that Tesla operates in.

Fig. 3: Global Manganese mine production & reserves

Source: The United States Geological Survey USGS

As the Kalahari field in South Africa constitutes 78% of the world's identified manganese resources (Ukraine accounts for about 10%), and those in the US are very low grade with high extraction costs, the US is wholly reliant on imports for manganese. Additionally, according to the latest USGS figures, total mine production of manganese is estimated to have declined 8.6% between 2015-16, at a time when its demand for steel production remains robust and battery demand is soaring. This has resulted in manganese being classified as a "critical mineral" by the USGS, which is defined as one that is essential to the economy as well as being at significant risk of incurring supply interruptions, making it an interesting prospect for value investors.

Zinc-Silver

The concept of a zinc-silver (aka zinc oxide) battery has been around for quite some time, and research has shown it has potential to offer more energy per ounce than any other battery formulation. Despite this, it has only just begun to make inroads into the consumer market, with for example, NASA's R&D paving the way for a rechargeable hearing aid battery.

At around 12 million tons of annual production, zinc is the fourth-most mined material on the planet and could allow for a cost reduction of up to 50% over lithium based batteries, as well as being lighter and posing no fire risk.

What has hitherto prevented wider implementation of zinc-silver technology has been zinc's tendency to form lattice-like structures, or "dendrites," which can spread the length of the cell and cause it to short circuit.

Zinc dendrites


Source: Video courtesy of Joshua Gallaway

To address this, researchers at the U.S. Naval Research Laboratory’s (NRL) Chemistry Division, have developed a formula in which a three-dimensional zinc “sponge” (3-D Zn) replaces the powdered zinc anode traditionally used. This 3-D Zn battery technology suppresses the growth of dendrites and provides an energy content and rechargeability that rival Li-ion, suggesting that it could meet the 24 kilowatt-hour demands of the Nissan Leaf in a smaller, lighter package.

Fig. 4: Zinc oxide battery energy density performance vs. Lithium-ion


Source: iaeee.org

Sodium and Magnesium

Sodium and magnesium are lesser known battery technologies currently being developed. Their potential rests in the ability to avoid several of the common issues associated with Li-ion formulations, including heat surges and exploding batteries.

A team of Swiss scientists supported by the Swiss National Science Foundation (SNSF) are currently leading research in producing novel, solid electrolytes for rechargeable sodium and magnesium batteries. Although sodium stores less energy than the equivalent mass of lithium, they have significant potential to be a good solution if the size of the battery isn't a factor for its application. The magnesium ion also has the added benefit of having two positive charges compared with only one in lithium, meaning it stores almost twice as much energy in the same volume. As with Zinc, both sodium and magnesium are abundantly available, giving them a big price advantage over lithium if the technology is commercially implemented.

Rollback of government subsidies

It is common knowledge that attractive government subsidies have played a large role in incentivising consumer purchases of hybrid and electric cars. However there are signs that such subsidies may not be as enduring as assumed, with several governments already having signaled a shift in policy with regards to EVs.

For example, China has made no secret of its intention to reach 5 million EVs on its roads by 2020, and although it has extended the tax rebate on purchases of new-energy vehicles (NEV) until the end of 2020, the Ministry of Finance is said to be working on a plan that would mandate authorities to phase out the incentives to discourage protectionism, help curb state expenditure, and redress some of the market distortions created by these monetary incentives. Case in point: Beijing reduced subsidies by 20% in 2017, and is said to want to gradually phase out all subsidies by 2020.

In the US, even though the tax credit for plug-in electric drive vehicles (PEVs) remained intact following president Trump's $1.5 trillion tax overhaul, much disharmony exists at the state level over which direction to go on EV tax credits. In Georgia for example, the termination of the $5,000 state income tax credit for EV buyers in June 2015 sent EV sales plummeting 90% over a six month period.


Could government subsidies for EVs be on borrowed time? (Source: Pixabay)

Even a small sales downturn in the two largest EV markets would be sufficient to affect aggregate demand for lithium, and the obvious conflict between governments' need to reign in spending and the long-term provision of EV subsidies is one that will only grow more pressured going forward.

Furthermore, recently published econometric research highlights how the net-environmental benefits of EV vehicles may not be cut-and-dry when measuring emissions in the context of the variable cleanliness of state/local electrical grids (for more, see Holland et al. 2015). This factor in conjunction with the increasingly documented effects of lithium waste–which could see subsidies shift to Li-ion recycling–may be sufficient to tip the balance in favour of governmental subsidy reductions for EVs.

Commodity boom and bust cycles

The final factor pertains to the need for seeing lithium within the context of its current commodity cycle. Mining activity in lithium producing countries such as Argentina, Australia, and China is currently on a tear, as projects accelerate the process of moving from exploration to production with the aim of getting estimated demand for their product filled up from robust upstream battery production. However, much of this activity is fuelled by the perception that lithium is indeed the next big thing, and there is a difference between finding a deposit and getting a mine operational.

In fact, most projects are expected to struggle to get off the ground. Of the 39 lithium ventures tracked by CRU, only four have firm commitments, and all of those are in China, adding about 24,000 tons of annual supply. This fundamental picture sits uneasily with the rate at which speculators have been throwing money at projects trying to capitalise on the lithium bull, much of which is reflected in the lithium spot price action in 2017. However, much of this speculative hot money too often winds up in operations with poor balance sheets or management strategies, and are typically the first to get flushed out after any significant spot price declines.

Fig. 4: 1-year Lithium spot price


Source: Tradingeconomics

Such a scenario would resemble the precipitous decline seen in the precious metals in 2013. Lower prices in the gold market forced miners to take huge write-downs and impairment charges, resulting in a spate of mine closures and the washing out of excesses built up through complacency and speculation over a previous 10-year cyclical bull-run (in Q2 2013 alone, Barrick Gold, Newmont Mining, AngloGold Ashanti, Goldcorp, Newcrest Mining, and Kinross Gold announced over $23 billion in combined write-downs and impairments). Given the solid streams of revenue for a traditional resource like gold, it becomes clear how risky a prospect lithium could be.

In summation, although lithium's fundamentals continue to look good, the market appears already to have priced in the long-term view without reflecting many of the short- and long-term risks and volatility. It is therefore critical that those looking to gain lithium exposure at the current juncture conduct a thorough analysis of these individual factors as part of a de-risking strategy for this increasingly multi-faceted market.

The information contained within is for educational and informational purposes only. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. McKay Research/James McKay is neither being compensated for this article, nor has any positions in the stocks/funds mentioned. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

#Lithium #ElectricVehicles #MetalsMining