Electric vehicle ‘cost puzzle’ looms as lithium prices soar

Electric vehicle affordability is poised to hit a speed bump on its descent down the cost curve, as global demand for battery-grade lithium begins to outstrip supply, driving up prices of the key ingredient in clean transport and clean energy transitions.

After a decade of falling prices, battery-grade lithium costs are ‘on the verge of skyrocketing’, Rystad Energy research says, posing the threat of a ‘major cost headache’ for builders of electric vehicles, just when the market is really starting to hit its braces.

According to Rystad Energy’s analysis from late last week, lithium prices are currently trading at an all-time high of US$35 per kilogram in Asia and are expected to continue climbing as high as US$50 per kilogram over the course of the second half of 2022 on the way to around US$52.5 per kg, this time next year.

Signs of turmoil were hitting the market towards the end of 2021, with a December report from S&P Global predicting that the meteoric growth in demand for electric vehicles in 2022 would lead to a deficit of lithium, as the use of the material exceeded production and was running out of stock.

According to Rystad Energy, the supply of lithium salts is expected to remain tight through the first half of 2022, at least, due to the backlog of production in China and South America.

Rystad says growers in these regions are reluctant to scale up operations, taking a cautious stance due to the continued logistical challenges posed by the global Covid-19 pandemic.

“Producers appear reluctant to sell significant volumes to the spot market as ongoing supply constraints and logistical issues caused by the pandemic create bottlenecks in the commercial lithium salts market,” the report said. .

This is likely to have a ripple effect on the price of EV batteries. According to Bloomberg NEF, lithium-ion battery prices — which have risen from more than $1,200 per kilowatt hour in 2010 to $132 by 2021 — could reach $135 per kilowatt hour in 2022.

As is the case with solar panels, the state of the market in China weighs heavily on the state of the global market for lithium, accounting for more than 65% of global battery production and more than half of the chemical production of lithium.

According to Rystad, the tight supply of lithium salts, combined with the demand outlook for LFP batteries that typically feed on lithium carbonate, should keep lithium carbonate prices high and support a noticeable premium per relative to the price of lithium hydroxide at the start of 2022.

Of course, this dynamic will not last forever. Rystad Energy believes the price premium will gradually reduce after seasonal bottlenecks in China ease and a ramp-up plan materializes in South America. Australian lithium resources could also help meet demand.

But don’t expect lithium prices to crash either. According to Wood Mackenzie’s research director for battery raw materials, Gavin Montgomery, quoted in FT.com last week, that outcome is unlikely.

“We are entering a kind of new era in terms of lithium prices over the next few years because the growth will be so strong,” he said.

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