Will Lithium Follow The ‘Super-Cycle’ Of Mining?

There’s an old adage for commodities that says, “the cure for high prices is high prices.” The inverse is true as well. In fact, I often heard this phrase when I worked in the oil industry.

At the same time, I often heard people say “But this time is different. This time there is no easy cure.” I heard that in 2008 when oil prices first topped $100 a barrel. Many people were predicting $200 a barrel. But a funny thing happened. Those high oil prices caused a recession, which reduced demand, which reduced prices.

Here is why the adage is generally true in both directions (at least in the oil industry). When prices are high, oil companies tend to invest a lot more into increasing production. But there is a lag between those investments and additional supply. So, prices may be high for a while, which can also 1). Slow economic growth; and 2). Influence consumer behavior to consume less.

Thus, new supplies may come online even as demand softens. That often results in a price crash in which investments dry up. Eventually demand recovers, but new supply stagnates. Finally, the excess supply dries up, prices start to rise, and the cycle repeats.

That is how it has been in the oil industry since the beginning. But will lithium follow that same trend?

Last year saw lithium prices soar due to increased demand for lithium-ion batteries as well as supply chain impacts due to the Covid-19 pandemic.

In February 2022, battery-grade lithium carbonate soared to $72,000 per metric ton, which was nine times higher than the 2020 price. Could we expect this lithium cycle to look like the time oil prices soared from $20 in the early 2000s to nearly $150 in 2008?

There are some extenuating circumstances that made lithium’s price rise much sharper than oil’s price rise 20 years ago. The growth of electric vehicles (EVs) – incentivized by governments all over the world – combined with a global pandemic that disrupted lithium supplies from China, resulted in this historic rise in lithium prices.

Will we now see a collapse in lithium prices for the same reasons oil prices generally collapse? Probably not, for a couple of reasons.

One is that global economy isn’t (yet) as dependent on lithium as it is on oil, so high lithium prices by themselves won’t cause a recession. Second, contrary to modern oil demand growth, lithium demand growth is on a steep increase. Thus, lithium demand growth may slow, but it is unlikely to contract as demand for oil did in 2008.

Maxim Khabur, Marketing Director at OneCharge Lithium Batteries, argued in a recent article that the current super-cycle for lithium may not be over, but he thinks lithium prices will finally level off in 2026 and beyond. Khabur’s takeaways were:

  • “Metal prices soared in 2022 due to increased demand for energy storage, EVs and other electric vehicles; COVID supply chain disruptions in China, the war against Ukraine, and Russian sanctions.
  • The continued demand for EVs continues to drive the battery-production market.
  • Investors seeking to profit from high prices in the raw materials market will spur a significant increase in the supply of battery metals by 2023 and 2024, pushing down the prices for these materials.
  • However, the resulting “super-cycle” in the battery mining industry may cause prices to shoot up again after 2024 before leveling off into 2026 and beyond.
  • China continues to dominate the battery metals production industry but longer-term developments in North America, like the Inflation Reduction Act, may reduce the country’s dominance.
  • Lithium iron phosphate (LFP) batteries are becoming more viable as rare-earth metals prices rise.”

The bottom line is that we are too early in the transition to know for sure whether lithium will behave as oil does. But there is one more important factor about lithium that doesn’t apply to oil. Lithium can be recycled, and high prices will also provide additional incentives to process that lithium and get it back into new batteries.

I agree with Khabur’s conclusion that high lithium prices are unlikely to substantially slow the growth of EVs over the next decade. There are simply too many factors driving this transition, and high lithium prices are unlikely to slow that down. Besides, the cure for high prices is high prices.

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