October 20, 2023 | Market Intelligence
Lithium serves as a crucial raw material for electric vehicles (EVs) and energy storage systems.
However, insufficient investments in new lithium sources in the past few years can potentially lead to a supply shortage as demand for EVs pick up pace.
Even established lithium companies with strong financials are grappling with difficulties in their expansion plans.
Lithium producers have frequently faced project delays, primarily because of the disruption from the pandemic and the associated supply chain complexities.
During a recent period of low lithium prices, investments in the sector dwindled.
In early 2018, there was boom in investment in increasing capacity for spodumene (an ore for lithium) in anticipation of an EV boom. The effort only materialized in the latter half of 2020. By then, there was a crash in lithium prices and the incentive of further investment dwindled.
This time, the situation is different because lithium demand is strong and growing faster than supply.
Global EV sales reached a record 6.2 million units in the first half of 2023, reflecting a 49% year-on-year growth. China, as the world's largest electric vehicle market, played a pivotal role in this growth, accounting for 59% of global EV sales in the past year.
Conversely, Europe, the second-largest EV market, experienced a more modest 15% increase in sales in 2022, primarily due to persistent component shortages aggravated by the war in Ukraine.
Meanwhile, the United States and Canada exhibited healthier growth, with a 48% year-on-year increase in EV sales.
The adoption of EVs is also increasing in emerging markets such as Indonesia, India, and New Zealand.
This jump in EV demand has compelled lithium suppliers to accelerate expansion efforts and launch new projects.
However, securing financing and permits remain a challenge.
Lithium prices have been falling since July 2023 because of cautious approach from upstream as well as downstream sectors.
Downstream demand recovery is slow, leading to limited transactions. On the supply side, lithium production is relatively stable, with an abundant supply of goods in the spot market.
Prices are anticipated to remain low for few months, primarily due to discoveries of new lithium mines in the U.S such as Exxon Mobil's lithium reserves in Arkansas and the Thacker Pass Lithium Mine (Nevada), which may contain up to 40 million metric tons of lithium.
However, these discoveries alone won't be sufficient to address lithium's long-term supply-demand imbalance.
Research by BMI anticipates a shortfall in lithium supply in the next 3 years. It projects that China’s demand for lithium in EVs alone would grow at an average annual rate of 20% from 2023 to 2032.
In contrast, China's domestic lithium production is expected to increase by just 6% in this period.
These new lithium reserve discoveries may exert a temporary influence on supply but they may fall short of satisfying even a third of the predicted demand.
The growing demand-supply gap in lithium is expected to push up prices. Despite substantial investments made by the EV battery industry to bolster downstream battery production capacity in response to the soaring EV demand, lithium production has not received the requisite funding.
This deficiency in investment could worsen the shortage. The insufficient investment in lithium capacity over the past five years is poised to prolong the supply shortage.
There is a need for increased investments as more lithium mines and mining exploration projects kick off, which could support the rising demand.
Additionally, streamlining the permitting process will be important. Currently, there are hundreds of lithium projects under exploration. Still, challenges persist due to geological complexities and the time-consuming nature of the permitting process, hindering the development of this critical industry.