What will happen to ‘technology metals’ in 2020?
Lithium, cobalt and other elements are crucial for a greener future, so why aren’t markets more bullish?
With global production of electric cars forecast to top 4 million in 2020 and 12 million in 2025, the early months of the new decade ought to feel like a boom time for the lithium and cobalt industries.
These “technology metals” are key elements in the electric batteries that power the new generation of green vehicles, as well as a host of electronic devices, from mobile phones to flat-screen TVs. A number of other rare earth minerals – such as terbium and indium – are also integral to the production of monitors, solar panels, smartphones and more.
As such, the industries that source and refine these elements appear to have a bright future. Lithium supply is set to triple by 2025 to more than 1.5 million metric tonnes, according to one estimate. Meanwhile, the consumption of cobalt in electric vehicle (EV) batteries is expected to reach 70,000 tonnes in 2025, compared to about 30,000 in 2020.
Figures such as these tend to pique investor interest. The EV market is in its infancy and, driven by environmental concerns, has nowhere to go but up. And despite calls by environmentalists to delay upgrading, US consumers continue to replace smartphones every 2.8 years on average.
Lithium price anything but bullish
Yet despite these indicators, the current state of the lithium market is anything but bullish. Lithium prices have fallen by almost 40 per cent over the past year, according to consultancy Benchmark Mineral Intelligence.
To add to the gloom, lithium major Livent said last week that it expected the lithium price to remain depressed in 2020. Chief executive Paul Graves added that current prices are “not sustainable for the lithium industry” and were discouraging investment. Livent is delaying expansion of a project in Argentina as a result.
Lithium is a victim of an EV market that has huge potential but has yet to come close to fulfilling it. When countries began openly discussing the eventual phasing out of petrol and diesel vehicles, investment flowed into sourcing and extracting battery metals. But China reduced EV subsidies in 2019 and demand in the world’s biggest market stalled. The result was a glut of unsold material and a plummeting lithium price.
“Lithium supply is growing far quicker than lithium demand and this can be said for all battery materials as the EV pick-up rate is not expected to really start increasing until the early to mid-2020’s,” said Marcel Goldenberg, manager for metals and derivatives at analyst S&P Global Platts, late in 2019.
The situation hasn't improved, in part because battery metal demand faces the same uncertainties as the rest of the global economy in 2020. Caspar Rawles, a senior analyst at Benchmark Mineral Intelligence, was predicting a better year for the lithium industry in 2020 based on a pick-up in the Chinese EV market. But that was before coronavirus.
“In January we had some good news with China saying it would leave EV subsidies unchanged this year,” he says. “Then came coronavirus, and we’re still not sure how significant an impact that will have. China has lost a month of EV sales already. The question is whether this is permanent demand loss, or whether consumers are just holding off and the market will bounce back later in the year.”
Subdued demand is already hitting miners. Australian lithium producer Galaxy Resources said last week that it had already seen a downturn in demand because of the outbreak. Galaxy is sitting on 65,000 dry metric tonnes of unsold lithium concentrate.
Cobalt price better placed
Like lithium, cobalt is a key element in EV battery manufacture. But it faces different challenges and may be better placed to recover from a similarly disappointing 2019.
The biggest challenge might be that most of the world’s cobalt supply is in the Democratic Republic of Congo (DRC). Doing Business says that “many sources of political and security instability – along with corruption, weak governance and poor infrastructure – contribute to the country's extremely deteriorated business climate.”
That climate has fed concerns for the supply of cobalt and discouraged investors. But the government said in January that it would create a state-owned company to buy all the individually mined cobalt in the country. The move was interpreted as an attempt to clean up an often chaotic supply chain and support cobalt prices.
In addition, analysts predict that cobalt output will slow in 2020, thanks in part to the two-year mothballing of Swiss miner Glencore’s Mutanda mine. Research company Antaike said late last year that it expected global production growth of 3.5 per cent in 2020, less than half of the figure for 2019.
So while cobalt markets shadowed lithium in 2019, with prices slumping from $40.50 a pound in 2018 to $16.70, a tightening market this year was expected to deliver reduced stockpiles and better returns. It still might, says Benchmark's Rawles.
“The cobalt price was steadily increasing across the board in January. But China dominates the supply chain in terms of refining cobalt, so while we still think it’s likely that prices will rise in the second half of the year, the caveat is that we don’t yet know what will happen with the coronavirus outbreak. But generally I’m more positive for cobalt than lithium.”
From feast to famine
But while slowing production might be good for short-term prices, it is sparking fears of under-supply further down the line. That’s true for cobalt, but even more of a concern for lithium. If current over-supply continues to suppress investment, the situation might quickly reverse.
Put simply, EVs help governments meet tricky emissions targets, so eventually everybody will be driving an EV. When just 2 per cent of current drivers do, that’s 140 million EVs.
So a lithium over-supply won’t be a problem for too long. Rawles says that, while Benchmark Mineral Intelligence has tracked $60bn of investments in battery production alone in the past 12 months, the raw materials for those massive new battery factories are being left in the ground.
Livent isn’t the only lithium industry player withholding investment. Nemaska Lithium has recently shed jobs at its Canadian Whabouchi mine. China’s Tianqi Lithium announced the postponement of the second half of its Western Australian plant last year, citing poor global returns. It takes time to source and extract raw material. Today’s mothballed mine is tomorrow’s stalled EV production line.
One beneficiary from all this might be the nascent EV battery recycling sector. Andrew Abbott, professor of physical chemistry at Leicester University in the UK, says that, through necessity as much as legislation, EV batteries won’t be headed for landfill.
“Finding ways to recycle EV batteries will not only avoid a huge burden on landfill, it will also help us secure the supply of critical materials, such as cobalt and lithium, that surely hold the key to a sustainable automotive industry,” he says.
Rare earths also vulnerable
The supply of other critical materials is less volatile, at least for now. The markets for rare earth elements such as neodymium, terbium and indium tend to be less dependent on the fluctuating fortunes of the EV industry. But China dominates the rare earths sector too, accounting for nearly 80 per cent of global production.
That gives Beijing a lot of power. Rare earths of different kinds are found in everything from lasers and medical equipment to consumer electronics. Prices soared last year after reports that Beijing might weaponise rare earth elements in its trade war with Washington, leaving investors to ponder what that might mean for the next iPhone upgrade cycle.
Those fears eased when the US and China signed a Phase One trade deal in January, but the incident shows the fragility of a market dominated so completely by a single player. That fact has only been emphasised by the extended closure of processing facilities during the coronavirus outbreak.
A crucial year for the lithium price and cobalt industry
Coronavirus continues to add a new element of uncertainty to already volatile markets. Lithium and cobalt might be essential to a greener future, but low global prices have stalled the gold rush. Nobody wants to invest in getting raw materials out of the ground if the returns barely cover costs.
Analysts had dared to hope for an upturn in 2020, but for now Chinese refining plants stand idle and consumers are shelving plans for shiny new EVs. Cuts in production mean cobalt may weather the storm, but lithium’s slump is deeper and recovery harder to predict.
Still, the recovery will happen sometime, because it pretty much has to. Emissions targets aren’t going away. The irony of the current over-supply is that it creates perfect conditions for scarcity down the line. Prices for lithium, cobalt and other earth elements will bounce in the end. Just not, perhaps, in 2020.
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