The electric-vehicle (EV) revolution is ushering in a golden age for battery raw materials, best reflected by a dramatic increase in price for two key battery commodities, lithium and cobalt, over the past 24 months. In addition, the growing need for energy storage, e-bikes, electrification of tools, and other battery-intense applications is increasing the interest in these commodities (Exhibit 1).
However, recent concerns regarding the future of the raw-material supply availability for batteries and the impact of rising commodity prices on battery production costs have highlighted risks that might create divergent futures for these two commodities. The strategic response needed will likely differ across industry players such as automotive OEMs, battery manufacturers, mining and refining companies, and financial investors. For all players, there is a growing imperative to understand the complexities and dynamics of this rapidly changing market and to ensure that their strategies are robust in the face of uncertainty.
We explore these themes in depth in a new report, Lithium and cobalt—a tale of two commodities. In this article, extracted from that report, we consider the supply and demand dynamics for lithium and cobalt and consider how players might respond. Our base-case analysis rests on a set of assumptions regarding global EV-demand growth and battery chemistries the industry will adopt. Although we believe these assumptions to have a high likelihood of occurring, government policies, battery-technology innovations, and industry economics will affect how the industry evolves. Any major changes in these areas might result in a vastly different outlook.
Dynamics for the two raw materials
Historically, both the lithium and cobalt markets have been driven by battery demand, primarily from consumer electronics, representing 40 percent and 25 percent of demand, respectively, in 2017. However, in our base-case outlook, the growing adoption of EVs and the need for EV batteries with higher energy densities will see the demand for lithium increase more than threefold between 2017 and 2025, to 669 kilotons lithium carbonate equivalent (LCE), the industry standard for measuring lithium volumes, from 214 kilotons LCE. Cobalt will increase by 60 percent over the same period, rising to 222 kilotons refined metal equivalent from 136 kilotons refined metal equivalent (Exhibit 2). This forecast assumes that lithium-ion-battery technologies will be the prevalent battery technology for the foreseeable future.
Recent price spikes for lithium and cobalt have raised concerns regarding the long-term supply availability of these commodities and highlighted the very different supply-side dynamics for both.
More than 95 percent of the world’s lithium supply occurs as a primary product in the form of brines or hard-rock ores, with a global production footprint including Australia, China, and Latin America. Conversely, less than 10 percent of cobalt supply occurs as a primary product, with the remainder produced as a by-product of primarily copper and nickel mines and more than 65 percent of global production concentrated in the Democratic Republic of the Congo (DRC). These price spikes have seen an abundance of expansion announcements for lithium over the next several years, suggesting ample capacity to meet the growth in demand to 669 kilotons LCE by 2025. However, there is much more concern for cobalt given the lack of transparency in the value chain and DRC country risk.
How players might respond
How and if these commodities diverge will depend on several factors, the most significant being the speed of EV adoption and the shift in EV-battery chemistries across geographies. Whatever future emerges, industry players will need to base their strategic responses on a sound understanding of the future supply and demand dynamics, battery-technology evolution, pricing, and risk-management mechanisms. Here are some players’ considerations:
- Mining companies need to show that they will be able to provide the raw materials required by the end users while balancing the pursuit of attractive profit pools generated by recent price increases and the potential demand destruction caused by end users’ concerns on continued price escalation. To accomplish this, miners need to become what analysts call “long-term greedy.” Instead of looking for short-term profits, miners need to collaborate with battery suppliers, automakers, and financial players to create a larger market for their materials. This might include partnering with battery manufacturers to shape existing technologies to ensure a stable, cost-competitive supply of necessary materials to customers; working with financial players to access cost-competitive, long-term funding to ensure the timely development of new capacity; and facilitating the development of a liquid contract market to help users and producers hedge out price risk.
- Battery producers and automotive OEMs will need to develop sourcing strategies to ensure a stable supply of lithium and cobalt to insulate them from the risk of shortages and potential price spikes. Clearly, cobalt represents the most pressing challenge, and users will need to look at their battery R&D to find diversifying technologies that will avoid the potentially supply-constrained raw material. This strategy is already taking place, with the development of the NMC 811 battery and initiatives to use even less cobalt in future batteries. This uncertainty might require automakers to keep several irons in the fire, as new trends could rapidly change the leading technologies for batteries. The prospect of such changes might require automakers to have a medium-term strategy and a separate longer-term strategy to account for developments in new technologies, such as solid-state batteries, graphene-based batteries, and even zinc–air batteries. Like mining companies, battery producers and automotive OEMs need to think beyond substitution—for example, partnering with mining, smelting, and refining companies to provide security of supply as well as transparency and traceability of the material along the value chain from the mine to the battery installed in the car.
- Financial players will also have a role to play in the evolution of the industry in two important respects: first, in the financing of EV materials, from direct equity investments to streaming agreements and helping companies in the EV-battery value chain hedge their financial risks, and second, in working with global exchanges and intermediaries to help increase market liquidity via new spot-market mechanisms as well as futures and derivative products.
We are already seeing the financial backing of new supply via streaming deals that provide the up-front capital required in exchange for a long-term, fixed-price material. It is possible we could see an asset-backed exchange-traded fund, which would purchase metal to be held as a more liquid option than the illiquid exchange trades. Private-equity players might also be new investors in mines, as the returns could entice cash-rich funds to make investments.
In essence, to realize the strong growth prospects of the lithium and cobalt industries, all participants—from mining companies to battery and automotive OEMs to financial players—will need to understand the battery value chain as an ecosystem and work with each other to provide transparency and agreement on key areas, such as battery technology, supply-side growth, and pricing mechanisms, to ensure the new era for battery raw materials is truly golden and not just gilded.
Download Lithium and cobalt—a tale of two commodities, the full report on which this article is based (PDF–1.1MB).