Peter Epstein of Epstein Research interviews Chris Berry of the Disruptive Discoveries Journal. Berry touches on the current situation for lithium supply and demand, also covering possible risks on both sides of the equation.
The following interview with Chris Berry of The Disruptive Discoveries Journal was conducted during the week ended June 26, 2015. I, Peter Epstein, CFA, MBA, have no prior or existing relationship with Chris Berry or any of his business interests. This is Part 3, the final chapter of my lithium market update. Click here for links to Part 1 and Part 2.
PE: Please provide readers with an overview of the supply side of the lithium market, including where we are in the cycle and possible risks to supply.
CB: The lithium market can best be characterized as an oligopoly. The major producers include FMC Corp, Sociedad Quimica y Minera de Chile (SQM), Albemarle Corp, and Sichuan Tianqui with other production in China as well. These major producers are responsible for almost 90% of global lithium production. The USGS reported that 36,000 tons of lithium metal was produced globally in 2014 which equates to approximately 160,000 tons of lithium carbonate equivalent, or LCE, which is the common way to compare lithium volumes.
The majority of lithium supply originates in South America (the Lithium Triangle in Bolivia, Argentina, and Chile), Australia, and China. There are a crop of lithium junior mining companies that are also aiming to join this rank of producer in the next five years. The main risks to this are the ability of them to secure off take agreements and to obtain adequate financing for capital expenditures. The average cap ex of the four companies who may be closest to production is $337 million. It’s important to remember that this number can improve as economics of a project advance.
Risks to supply include inclement weather (both lithium brine production and hard rock projects have been affected in recent years), ability to obtain financing, and resource nationalism, or governmental interference.
PE: What are your thoughts on the demand side? Are there wild cards that could challenge the conventional wisdom that demand will come entirely from batteries?
CB: Given the relatively small size of the market, I like to say that lithium punches above its weight class. Lithium demand growing anywhere from 8 to 10% per year and this is mainly due to growth in the lithium ion battery business. I don’t see any wild cards at this point that could change that. Lithium is used in a number of different industries including ceramics and pharmaceuticals which are growing more in line with global GDP. This is unexciting, but offers a steady growth profile. One wild card to consider may be all of the research and development focusing on building a lithium ion battery with longer life or more power density. The possibility exists that a breakthrough here could potentially harm lithium demand (we may use less, for example). I think this is highly unlikely any time in the next decade, but has to be taken into consideration.
PE: How important is the growing use of lithium for alloys such as lithium/aluminum for key components of airplanes, cars and the like?
CB: Coming back to my previous comment on research and development, the aerospace market should be included here as well. Scandium, titanium, and other alloys are all being experimented with or used on a smaller scale. Lithium appears to be the front runner as it offers an optimal blend of light-weighting and strength at an acceptable cost. I don’t expect it to become a huge source of demand, but as an example, Alcoa supplies airframes to multiple airframe manufacturers including Airbus and Boeing. The company has said that they have contracted $100 million in aluminum lithium revenues to 2017 and expanded production capacity to produce 20,000 tons of lithium aluminum per year. The preferred materials will demonstrate the optimal properties and offer the most attractive economics to manufacturers and consumers. Clearly lithium is a front runner here.
PE: How important on a global scale is lithium? Is it listed as a “critical metal” in any countries? Is anyone stockpiling lithium?
CB: As fond as I am of lithium, it’s not terribly significant on a global scale today. Lithium is critical today for next generation tech and will remain so for some time. That said lithium can literally be found everywhere – even in seawater. Even if lithium demand were to continue on its impressive growth trajectory, it would still only be about 400,000 t LCE by 2025. In 2010, the US Department of Energy published a report which labeled lithium as critical to clean energy growth but only moderate in its supply risk. Despite its small overall size, a secure supply will remain critical for technology supply chains. This is especially important as new energy infrastructure is built out such as distributed generation with solar and energy storage through batteries.
PE: Regarding the Lithium Triangle of Argentina, Chile and Bolivia, is there risk of disruption of supply due to politics or other factors?
CB: Despite the lengthy history of lithium production from this part of the world, a looming Presidential election in Argentina and a more vociferous government in Chile promise to increase the potential for a supply disruption. Bolivia, once called the “Saudi Arabia of lithium” remains a challenging destination for investment based on the threat of expropriation. Adverse weather in this region in recent years has also harmed production.
It’s difficult to predict how (or if) anything will play out, but an understanding of potential alternate suppliers in other parts of the world such as Australia, the US, Europe, or Canada is warranted.
PE: What properties of lithium, the lightest metal, make it important in many applications?
CB: Lithium is the lightest of all metals. It is for this reason that lithium ion batteries are usually preferable to other chemistries like lead acid. Used in a car, lithium ion can reduce overall weight, improving efficiency. As the cost per kilowatt hour continues to fall for lithium ion batteries (currently declining at about 14% per year), you should see them replace more lead acid batteries in the future. With respect to consumer tech, while the lithium ion battery was discovered decades ago, it wasn’t until 1990 or so when Sony became the first company to commercialize the technology in its video recorders.
PE: Has the use of commercial-scale lithium in batteries and large-scale energy storage made it the go-to metal? Or are other battery chemistries a near- or intermediate-term risk?
CB: For now, the answer to your first question is yes. As I mentioned previously, there is a substantial amount of R&D taking place and it seems that every week there is a new battery breakthrough (lithium air, zinc bromide, aluminum air, etc). While these are newsworthy, the technology isn’t scalable and won’t be for some time. For this reason, lithium ion chemistry will remain dominant for some time to come – perhaps a decade at least.
An important question to ask battery manufacturers as they ramp up production is how they’ll be able to shift production methods should a new and more beneficial battery chemistry emerge.
PE: How important is grade? In sectors such as graphite, grade is widely considered of paramount importance.
CB: Grade is important, but not the most important factor. Regarding my previous comments on lithium brine versus hard rock mining, the processing methodology is what determines the ultimate cost. There is also an opportunity cost here. Though lithium brine production is cheaper on a per ton basis, the 18 months it takes to produce the lithium compound represents an opportunity cost which is difficult to quantify. I’m also not sure if I entirely agree that grade is the most important factor in graphite mining. Flake size and footprint are at least as important, not to mention an off take partner.
PE: What are the differences between hard-rock mining of lithium and lithium brines? Does each approach end up with roughly the same ending product?
CB: See my responses above on this topic. Yes, each process does result in the same product depending upon what you’re aiming for. Brine production versus hard rock is essentially chemistry versus traditional mining. They each have separate costs and benefits despite the traditionally lower operating expenditure associated with lithium brine production.
PE: Thanks as always, Chris, for your time and expert opinion.