Lithium prices to keep rising as demand outpaces supply

Lithium prices are set to extend their recovery from a brutal sell-off of 70 per cent as demand outstrips weaker-than-expected lithium supply growth, underpinned by the growing take-up of electric vehicles to meet carbon emission targets.


The recent rise in lithium prices follows a horror five-month period during which tumbled more than 70 per cent after China curbed electric vehicle (EV) subsidies in January, a move that led to faltering demand and rising inventories.

Now those inventories are winding back and at least one broker, Morgan Stanley, believes lithium markets have reached a turning point.

Lithium is an important element to create renewable energy given its use in lithium-ion batteries, used to power EVs and to store energy generated from renewable sources such as solar and wind power. As more countries move towards clean energy, the demand for lithium is expected to keep on rising, which will push up its price, even as supply increases.

“I don’t see lithium as a one-off flash in the pan. The demand for lithium carbonate, or battery-grade lithium, is increasing at a rapid rate because of the rate of EV production increases,” says Shane Langham, a senior private wealth adviser with Sequoia Wealth and author of the Charting Wisdom technical analysis report.

“That doesn’t even touch on the big batteries used to support electricity grids or to store renewable electricity generated by solar or wind or the like. When the supply and demand equation is so lopsided, where demand is multiples the size of the supply, price can do only one thing, and that is rise,” he says.

“Given we have seen the price for lithium drop 72 per cent [at the April low] from the high in November 2022, this, to me, looks like not just a good opportunity but a great opportunity to buy into weakness for a very bright future to 2030 and beyond.”

Lithium is not traded on international commodity exchanges like other industrial commodities such as copper, lead and zinc. It is mainly traded on exchanges in China, which accounts for most of the world’s EV battery production. Carbonate spot prices have bounced 30 per cent from their lows and hydroxide has recovered 20 per cent.

Batteries accounted for nearly 80 per cent of all lithium use in 2022, Australia’s Office of the Chief Economist says. That proportion is expected to rise to 90 per cent by 2028 as more people buy EVs as prices fall.

Lithium’s strong price increase last year was largely propelled by improved investor sentiment around EV adoption as well as US government policies, says Emanuel Datt, managing director of fund manager Datt Capital. In particular, President Joe Biden’s Inflation Reduction Act has helped turbocharge the transition to renewable energy.

“We expect the lithium sector to remain stable with upside potential given the widespread government support for the energy transition,” says Datt.

“Greater end-demand for EVs and alternative energy storage solutions means greater demand for batteries and battery materials, with commensurate pressure on supply.”

Global lithium demand will reach 989,000 tonnes of lithium carbon equivalent in 2023, above the 964,000 tonnes of production expected this year, the March-quarter report from Australia’s Office of the Chief Economist (OCE) says.

That deficit of supply is expected to persist until 2027 when production will outpace global lithium demand, the OCE forecast.

Until then, with demand outstripping supply, lithium hydroxide prices are forecast to rise to $US61,520 per tonne in 2023 from last year’s $US44,090 a tonne, but then ease to $US36,220 by 2028, the OCE said.

In the year ending June 30, Australia’s export earnings from lithium are forecast to more than triple to $18.6 billion from $5.3 billion in financial year 2022.

S&P Global Market Intelligence also forecasts a deficit of battery-grade lithium, or lithium carbonate, in coming years, which is expected to support prices above $US40,000 a tonne as demand outstrips supply.

Darko Kuzmanovic, senior portfolio manager at Janus Henderson is also upbeat about lithium prices. He notes that the International Energy Agency (IEA) has forecast that EV penetration is expected to jump to 14 per cent of all vehicles sold in 2022, up from around 4 per cent in 2020. By 2030, penetration is expected to surge to more than 40 per cent.

“This is a structural and long-dated, decades long theme, that has just begun. Over the last five to six years, lithium demand has fluctuated at a compound annual growth rate (CAGR) of 25 per cent per annum. This is expected to continue until EVs become the dominant type of vehicle,” Kuzmanovic says.

“At current prices, the industry will continue to make great returns. While it is still early to say, a bottom could emerge by mid-2023, assuming normal markets and no global recession.

Over the last 12 months, we have seen large automakers such as Ford, GM, Stellantis, and Tesla becoming involved directly supporting [lithium] projects with offtake, debt and some equity participation. They see the need to secure more supply, to meet their 2024 and beyond delivery plans.”

That’s because EVs require a lot of lithium to power movement. According to Langham, a 70 kWh Tesla car battery contains around 62.6 kilograms of lithium carbonate and with Tesla having produced 1.31 million EVs in 2022, this works out roughly at 82,000 tonnes of lithium carbonate from Tesla alone. 

“There were 10.6 million EVs sold in 2022. That’s about 663,500 tonnes of lithium carbonate based on a 70 kWh battery per EV. To get this up to 200 million EVs by 2030 [as the IEA says is required], we would need an increase of 17.9 times over the next seven years. Working on the 62.6 kilograms of lithium carbonate in a 70 kWh battery as an average per EV, that works out at about 12.52 million tonnes of lithium carbonate needed in the year 2030 alone. This is 23.2 times more lithium carbonate that what was produced in 2021.”

While lithium demand is forecast to rise, not all experts see an immediate recovery in the lithium price. Sam Berridge, portfolio manager of the Perennial Strategic Natural Resources Fund, expects lithium prices to consolidate after such a large drop, with supply having increased in response to higher prices.

“There is certainly enough lithium to go around. While demand exceeded supply in recent times, high lithium prices have led to a flood of capital into the space, which in turn has funded the mining industry to an extent that global production has roughly doubled over the last two years,” he says.

“The impact of which has seen lithium prices drop by over 60 per cent in the last five months. There are few better examples of the truism: nothing cures high prices like high prices.

“Looking forward, lithium prices now are at a level where the highest cost producers are losing money. Demand growth remains strong, so we’re likely to see a period of price stability after such a sharp fall,” Berridge adds.

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