Insights into the Lithium Industry
The use of gasoline has revolutionized energy storage. The substance’s energy density has led to its transportability and the internal combustion engine that depends upon it has become the lynchpin of the global transportation network. By contrast, batteries were largely relegated to use in handheld devices and for the forms of communication that existed at the time. The remainder of the energy used came through the electrical grid, produced from either fossil fuels or nuclear plants. Both forms of energy have changed very little from its first creation. However, due to developments in the past decade, both the structure of the electrical grid and the fundamental energy source in transportation are expected to change in the coming decade as a result decreases in price for the lithium ion battery. Consequently, the lithium industry and players within it will have an outsized influence upon the global economy by playing a crucial role in the innovations in both sectors.
In the past two decades, the demand for lithium has increased dramatically. Smartphones, laptops, smartwatches, and many other handheld technological products that have been developed in the past two decades have created a dramatic increase in the demand for lithium, with lithium production more than sextupling since 2000. The pressure placed on the lithium supply is expected to increase in the next decade. The value of the phone battery industry is expected to increase from 22.8 billion dollars to 91 billion. However, a major driver of the increase in lithium demand change comes from the automotive industry. LG Chem, the battery producer for General Motors and Volkswagen, predicts that electric vehicle sales will jump from 2.4 million last year to 13.1 million by 2024.
Despite such a dramatic increase in demand, the price of lithium battery packs has fallen by 86 percent in the last 8 years, largely due to an increase in supply. The price is forecasted to continue to fall, with the cost of batteries for cars predicted to fall below $150 per kWh. This is the price at which electric vehicles are deemed to be competitive with internal combustion engines regardless of government tax credits. However, the extrapolation of recent trends fails to account for the location of the supply for lithium, which will become impossible to ignore over the following decade.
In 2016, the combined lithium production of the top four producers, Chile, China, Argentina, and Australia was 36.4 thousand tons. In 2018 it was 81.2. However,this dramatic increase occurred almost entirely in Australia, which increased from a production of 14 to 51 thousand tons. In 2018, Australia produced 40 percent of global lithium output. Interestingly, however, this trend is in stark contrast to where Lithium is actually found, 68 percent of the world’s Lithium is believed to be found in the Lithium Triangle, which is between Argentina, Chile, and Bolivia. The developments that are reliant upon the continuous decrease in Lithium’s price are dependent upon the expansion of production in these three countries, and consequently are particularly vulnerable to any political shocks in the region.
The possibility for the three countries to form a cartel and restrict the supply of lithium in the coming decade is real. There is not likely to be a new type of battery created capable of replacing the lithium ion battery anytime soon. Diplomatically, however, the formation of such a cartel seems unlikely because the three governments would have to have amicable relations. Considering the politics of the region, which is highly dependent upon the political leanings of each country’s governments, it is quite possible that any treaty or alliance in the region would only last as long as the specific political regime lasts. This political polarization can be seen in the last half a year alone as Argentina hosted the ex-President of Bolivia after he had been orchestrating a siege on the capital of Bolivia to oust the interim government. Consequently, the likelihood for relations stable enough to form a cartel are low.
As a result, it is more likely for the characteristically unstable domestic politics of the region—rather than international coordination—to impact, and disrupt, the increase in lithium supply and drop in price. In the last half a year the Bolivian president was ousted by the military and opposition on false claims of fraudulent elections. Protests in Chile resulted in the government agreeing to write a new constitution.The Argentinian electorate voted Kirchner once again to the Casa Rosada, despite her already being facing trial on over a dozen charges of bribery, embezzlement, and money laundering. The spillover on the lithium production is immediate, even in the most stable of the three, Chile. The government secured three companies to build factories within the country for battery production, using lithium mined by Albemarle, the world’s largest lithium producer. However, as it becomes clearly evident that Albemarle would not be able to produce the required amounts of Lithium, all three firms backed out. Albemarle itself has scrapped projects to increase lithium processing capacity within Chile by 125,000 tons. Put in context, global lithium demand was 300,000 tons in 2018 and will increase to 850,000 tons by 2025. In Argentina, after the election primary the stock market fell by 40 percent and an 8 percent tax on Lithium exports was just put in place. The current front runner in Bolivian elections supports the nationalization of Lithium production. What these recent events reveal is a political instability that is directly preventing the stable expansion of lithium supply. Lithium production will be vulnerable to a wide variety of supply shocks created by these three governments, which between them have control over 68 percent of global lithium.
Although Australian output has allowed for a dramatic increase in demand, the recognition that Lithium industry, much like that of oil, is dependent upon political events in unstable nation must be made. UBS calls for the energy storage market to expand to as large as 426 billion dollars in the next decade. Lithium will approach prices where using lithium to stabilize electrical grids operating off of renewable and more unstable sources of energy such as wind and solar, without the need for a coal or nuclear plant operating at all times in the background becomes profitable. Any supply shock threatens the profitability and feasibility of any projects creating such grids. Although the expansion of lithium production is continuing at unprecedented rates, the lithium market and its vulnerability to supply shocks created by political events in developing nations must be taken into account for the powerful influence it will hold over the cutting edge of innovation in the global economy and the hindrance to growth it will cause with regard to both electric vehicles and the electrical grid.