Lithium, the play

Many people have asked me why I am so bullish on the first element of the periodic table. And the answer is easy: they fulfill and will continue to fulfill the most vital and first principle of the economy: demand.

The demand for this Alkaline metal is growing each day, and it is by no means a new technology, but for sure it is a technology optimized good enough to be in the best years. But first of all, what is lithium and where do we use it?

Lithium is one of the main components of the batteries we use almost for everything. Look to your right, look to your left, look up, look down. I bet you have seen at least one device with a lithium battery in it. Remote controls, smart phones, watches, computers,… even emergency lighting are suited with lithium batteries. Less alone the most known and more demanding thing of lithium batteries: the electric vehicles (EV) with a big variety of them such as scooters, bicycles, motorbikes, cars, trucks, buses,…


Why lithium (and what it is called Lithium Ion Batteries)? Because they have the highest charge capacity in history. There are other kinds of batteries based on other minerals (mostly salts) but they are not that charge efficient. (More on efficiency and why it is important further in this post).


Of course, not everything is suited with the same batteries. And even not all the batteries have the same chemistry. The smallest objects, the household products where we can change the batteries easily (like in the TV remote) the batteries are either button or in the wide range variety of AA, AAA,… but in most of the devices not thought to be open and changed but recharged, the batteries are normally also following standards. Yes, laptops and cars share the very same modules of batteries, with very few exceptions.


Lithium Ion Batteries were invented during the 1970s and even if we have seen them ever since there were really no cars using them as main source for the energy. GM, VW, BMW,... all have failed projects or prototypes of EV cars that used these batteries, because the chemistry was not perfect and the stability of the batteries made it unreliable, slow to charge and too heavy. https://newsroom.porsche.com/en/products/taycan/history-18563.html

It was at the beginning of this century that batteries were in the best shape possible and electric motors have also improved their efficiency that EVs started to make sense. And if we join this, to a very boring car industry making un-fun every motor, a problem with contamination worldwide and the petrol prices always going up… you have the perfect environment for the EV to succeed.


But, is the hype really that powerful as to change the industry? Well, for the ones of you that read my blog you know how bullish I was on Tesla and how bearish I am nowadays. But there is something undeniable, Tesla has changed the industry forever. (And the total change and disconnection from the ICE (internal combustion engine) may arrive quicker than we think.)

Tesla of course was not the first one to create an EV car. As said, many tried and failed. Maybe it was not the right time, maybe it was not the right design, or maybe it was not good enough (normally this). But in the same way that Steve Jobs put a smartphone in our pockets, Tesla has brought the EV to life.

Apple with the iPhone and Tesla with the EV car were not the first, were not the cheapest, and were not the only. But they created the need for it, they showed us how much better it could be than what we had, and created something beautiful that people would like to show. It was as important the product as creating the need for it.


The industry, meanwhile, have seen this change as a call to action. History repeats a lot more often than we think. And as competitors took little to no time to introduce their own smartphones, car makers have followed the path of Tesla. Check every single brand in the market today, specially the old traditional brands like Ford, VW, Toyota, Mercedes… They are all presenting new models that are fully electric. Indeed, it is easier to see the new EV models being presented than the new ICE models that they are still presenting. Now look closer, check out the traditional models of each brand. The F-150 in Ford, the best selling truck since 1977, now electric. The very German BMW 3 series, now hybrid (and the very similar 4 series with pure electric version) or the very massive and colossal Mercedes G-class, about to be presented in fully electric.

Companies are taking their all time well-known models and transforming them into electric as they amortize the costs from the ICE development and understand the tech needed for EVs. Cost that new appearing companies do not have.


This brings us back to why Lithium is a better investment in the long term than the EV manufacturers, even if this sounds difficult to understand. Once again, we should check our history books. When the ICE car first appeared at the end of the 19th century, and especially once the standardization and understanding of the ICE motor was spreaded, hundreds of car manufacturers appeared all over the world.

To mention only two countries, in the UK there were over 90 car producers in 1922 and in the USA over 253 companies were producing cars in 1908. The number quickly decreased (specially in 1929, after this year there were “only” 41 UK manufacturers and 44 US manufacturers). This fact doesn't mean that the demand decreased or disappeared, actually the demand in 1929 was 4 times bigger than in 1922.


Companies could get the hit of the economic crash while selling too few models and therefore many merge into groups, where bought by others or just stop producing and went home. (Fun fact, in the year 2020 only 60 car companies continue producing cars worldwide and only 14 are consider major global corporations). The same is about to happen, we have way too many EV small companies producing or designing (not yet in production) EVs. Small trucks, utility vehicles, cars, trucks,... it seems that anyone with some cable to join a battery with a motor is willing to have their own company. And as it happened in 1929, most companies will just disappear. Which ones? It is hard to know. Market trends change nowadays as fast as the weather in summer, and even if some seem more reasonable to stay any bad wind could make them fall. The biggest threat they have now is the battery supply, exactly where the lithium is.


This is why lithium is a more solid long term play than any EV company. The demand for lithium and the bottleneck with lithium production is making it difficult for EV companies to deliver their product or even maintain prices. For many, this means making less money out of every car as we saw recently with Ford announcing that because they have maintained the price of the E-match (but the price of minerals has skyrocketed) they are now making no money out of every sold car. For others this means making the cars more expensive, a play that some can afford (like Tesla) and some can not (like companies at the beginning of production without a fixed income rolling in). These companies are manytimes selling products where an increase in price could wipe away all the profit or even bring the company down into a massive debt. Last, there will be companies that just can´t buy the batteries because it will be way too expensive to even consider, or even because they won't find any in the market. An EV without a battery is like a body without a heart, it just cant work.



This brings us to the numbers.

In each battery we find around 20gr of lithium, also depending on each manufacturer this numbers could change slightly. Others components are Nickel, Manganese and Cobalt. Not all have the same components but lithium is for sure present in every single one of them. Some of the most common chemistries in batteries are the NMC (333,532,811,622), LFP or NCA (I am not going to explain the difference as a quick Google search will give you a very comprehensive explanation of each battery).To have one kWh we need approx. 136 batteries (2Ah - 18650). And in each car we have between 20kWh of the less powerful models such as the first Nissan Leaf, Renault Zoe and current Fiat 500 and Smart Fortwo, to the amazing 110 kWh mounted in the most long ranged cars such as the Rivian RT1 and the Mercedes EQS. Electric buses and trucks have a battery capacity from over 400kWh and up to 1.000kWh of the Tesla Semi Longrange (so, the equivalent of 500 Fiat 500). For making the math a bit easier, we will assume that the “media'' is not 70kwh but 60kwh (a capacity many cars are mounting nowadays and given that probably the most powerful evs will be less sold than the smaller batteries and therefore cheaper cars) and I won't include buses or trucks, even when many cities are changing all the buses for electric buses and therefore making the demand for batteries even bigger. Did you know there is a city in China with over 16.000 public electric buses?


But with all these different numbers, how can we know how the demand will grow?

Lucky us, there are several agencies studying how the market will grow. The main ones are IEA (International Energy Agency), Benchmark Minerals, Tesla (as leader, at least until 2022, of the EV industry) and China (that holds over 90% of world battery production).


The IEA forecast a total of 1,5 tWh being produced each year by 2030 (from the 170gWh produced last year). Benchmark Minerals, a provider of data and market information on the lithium industry, on the other side forecast 7tWh/year by 2030 to provide cover for the demand. Tesla forecast to produce 100gWh alone for their cars, even when they forecast to be a 2% of the world fleet in best case scenario (that translates into 5tWh/year globally). And the Chinese government (easily the biggest market for EVs as it is mainly the biggest market for everything adopted by masses) forecast a demand for batteries of 8,8 tWh/ year by 2030.

This translates into a global demand of lithium* according to the different forecasts of:

IEA: 3.75 mill tonnes of lithium

Benchmark: 15 mill tonnes of lithium

Tesla: 12.5 mill tonnes of lithium

China: 22 mill tonnes of lithium


*1kWh are around 136 batteries with 20gr of lithium per battery. This means 2.5kg (approx) of lithium in each kWh.



In contrast to the 2022 forecast, we have here also the 2021 forecast. We can see how much the situation has changed from one year to next, thanks to the mass adoption of the EV.





The global lithium production in 2021 was 100.000 tonnes, falling short 37,5 times the most conservative forecast (the one of the IEA). The demand could grow even faster in some external factors are brought into play such as new economies (like India) making a faster change to EVs, more restrictive regulation to avoid climate disaster or even wars (that normally bring the price of petrol up and therefore make more attractive the idea of paying less for driving an EV).

Of course this differs depending on the chemistry, for instance last year (2021) the global production of batteries was 296gWh meaning that if we adjust to the number compared with the global lithium production we will not see more than a 7x in the demand (for the IEA forecast). How could there be such a difference? As said, the chemistry differs a lot from type to type. A car with NCA and 70kWh would have around 12kg of lithium, while one with NMC would have 8kg and one with LFP would have 6kg. At a point the demand comes down to what is the favorite and dominant kind of battery in the market, and the regulation it has.





The regulation is another important point. One of the main questions (and myths) about the EVs is: is the battery thrown to the garbage at the end of its life? The answer is NO. At no point in time that was an option and in fact the recycling industry for batteries is forecasted to grow from $2b from 2021 to $30b by 2030. The hazards that batteries represent for the environment is not something new to the world, and governments have been regulating the battery industry even if we haven't seen it. Also, the increasing prices of the minerals, and the possibility of recycling them make it attractive for companies to rely on already produced lithium instead of buying more. Last but not least, lithium, nickel, manganese and cobalt (to mention the main components of the cathode of a battery) are limited and they are not everywhere. This means that the main lithium producers, or the countries where the land is rich in this mineral, are likely to become very rich (as it happened with the UAE and the petrol) while the rest of the countries watch and pay whatever the price the producers want to have (as we are doing right now with the prices being dictated by China for the Lithium). Again a game of geopolitics and “freedom” wars. This puts more pressure into recycling as governments are starting to see the minerals coming into the country (either mined or important) as an essential part of the energy and production power of the country.

In the USA and in Europe, laws for the amount of recycled minerals in each battery used were approved in the first months of this year (2022). This is also great, as recycling the main minerals could help to bring down the price (same demand + more product = cheaper price).


And what about other techs like the Hydrogen car?

This tech is great for many reasons. For example, because it is easy to store Hydrogen for many months and in great quantities as it is light and easy to transport. Also, because it is light, it makes sense to use this system for EVs where the weight is a problem, like long range buses or trucks.

Unfortunately, this tech is anything but cheap.

You think a Nissan Leaf (approx. 33.400€) compared to similar cars like the Toyota Corolla (approx. 27.000€)? Well, the Toyota Mirai (a very similar car if we are talking about design) starts at a whopping 63.900€. So if you are willing to pay 2 times the price of the Leaf for having 200km extra range, this is your tech.

The problem with Fuel Cells (the tech behind transforming Hydrogen into electricity) is that it is not easy to build. Needing a lot of parts, metals and work. Of course, once escalated it is easier to find a good price. That is why it makes sense to use this kind of system with trucks, buses and ships.

Then we have the problem with the hydrogen wanting to get out of the tank, and the annoying problem with it catching fire very easily… If we combine nice fast cars with hydrogen and maybe an accident we end up with the “Ford Pinto” problem all over again, but with explosions. That is why, again, it makes sense to use this tech for slow moving vehicles, and even for static use, like UPS (Uninterruptible Power Supply) and Powerwalls. Actually, in UPS systems work great, as it not only produces electricity but the leftovers of the reaction is cold water steam, perfect for a cooling system.


To recap:


  • Demand is expected to continue growing strongly in the coming years, even if we get into a global recession. Companies have already invested too much money into EV and already have a date marked in the calendar to kill the ICE. A global recession would very likely only bring that end closer as there will be really no point in killing the tech all the governments are making pressure to adopt, and a technology that is cheaper to produce (but that can still be sold more expensively).

Just today, 27.10.2022, the EU has reached a deal to ban new combustion-engines from 2035. A very optimistic target that only brings more pressure to the EV industry. (Make sense of this kind of law? In my opinion, if we want to have cheap EVs: no.)


  • This demand will impact the price of lithium, while the cost of producing lithium is not changing. The production of lithium takes up to 7 years to make an operating mine and between 12 and 18 months to get the first production. Meaning that even if we all jump into producing lithium tomorrow, we wouldn't be producing until already the decade is over.

But at the same time demand for EVs is growing more than expected, bringing the prices of minerals up and making agencies update their forecasts almost on a daily basis.


  • There is no way we are not using this technology at least for another good 2 decades. Why? As with the ICE cars, the system is not 100% but the money already invested has made governments and car manufacturers go into great debt to change technology tomorrow. The thousands of charging stations already built, as well as the hundreds of gigafactories planned and where money is being invested make us be in an “all in” play with the EV car.





Even if we finally decide to all together use another technology, we will end up paying extra for the new tech in order to cancel EV debt. This is nothing new, companies like the PSA Group launched first generation EV cars really ugly and expensive, with almost no range and a very high price in order to get back some of the money they have just spent in R+D for the new ICE generations. And companies like BMW delayed the EV production as much as possible to continue selling the very expensive R+D of the ICE engines.


  • Recycling (since the mineral is already produced) is the only way to cool down the price, while is something we need, meaning the relevance it will have in the medium and long term could be essential for the EV industry and the world fight against climate change.


I will not enter to discuss if an EV is really green or not, or if it is possible to live with an EV. These topics will be presented in another post.




Comments made on companies or commodities showcased are an expression of opinion only, and should not be construed in any manner whatsoever as recommendation to buy or sell any financial instrument at any time.




Links:


Electric Porsche: https://newsroom.porsche.com/en/products/taycan/history-18563.html


Car Manufacturers in UK: http://www.autolinkspro.com/history.htm


Car Manufacturers in USA: https://www.history.com/topics/inventions/automobiles


Types of LiON Batteries: https://dragonflyenergy.com/types-of-lithium-batteries-guide/


Lithium Price Forecast (Revised in Oct. 2022): https://germanlithium.com/language/en/lithium-price-forecast/


How is lithium produced: https://www.youtube.com/watch?v=50rXYrFCQMw


Battery production in Europe: https://battery-news.de/index.php/2022/07/01/batterieproduktion-in-europa-juli-2022/


IEA forecast and energy report: https://www.iea.org/reports/world-energy-outlook-2022