“Lithium is the new oil,” goes the saying in electric vehicle (EV) circles.
If you haven’t heard the catchy maxim, it means that new-age batteries made from elemental lithium are the energy world’s “in-thing.” By extension, a tank of gasoline containing a cocktail of carbon and hydrogen atoms is passé.
Think back to the early 1900s: It’s like an oilman wearing spats and a fedora walking into a cowboy bar saying, “Oil is the new horse hay.”
Fast forward to today: I’m a believer that lithium-ion batteries are going to power a lot of cars going forward. It’s a nascent trend that’s just getting started.
But my head hurts when running the numbers. The equivalent of 15 million cell phone batteries are needed to make one battery for an 80 kWh electric car. So, ramping up raw material inputs to build millions of car batteries a year fills the back of the envelope with scalability issues.
Lithium, like oil, is found in the earth’s crust. So are other raw materials—like cobalt and graphite—that are needed to build a typical rechargeable battery. Supplying these for cars, home storage and other potential high-growth markets will require vast global supply chains of extraction, refining, distribution and recycling, not to mention the financial infrastructure to trade the commodities.
Yet, the many raw material supply chains for larger-scale batteries are immature relative to the potential market pull. Every few weeks the projections for EV sales steepen. Everyone talks about car and battery plants. Amidst the hype few talk about upstream mines and processing facilities. It’s like being bullish on gasoline cars and refineries, but dismissing the importance of scaling up oil to meet the demand.
We can look back to the history of oil and early cars to understand scalability.
Consider this: By the time Henry Ford’s fledgling auto company launched the mass-market Model T in 1908, John D. Rockefeller’s Standard Oil Company had an estimated market capitalization of $1 trillion (in today’s dollar terms). An equally formidable global supplier of oil at the time was the Royal Dutch Shell Group.
There was no shortage of oil when the gas-powered car came out. Already fueling lamps, ships and trains, the oil industry of the early 20th century was a ready-to-go, rapidly scalable supply chain waiting to fuel the adoption of millions of horseless carriages.
The reverse is the case for the EV business today. Battery powered cars are potentially coming to market far faster than the back-end resource industries needed to supply them. Batteries need many different raw material supply chains to ramp up; petroleum cars only needed oil.
Battery bulls tend to trivialize the issue of resource supply. A common, don’t-worry-be-happy refrain comes with a broad wave of the hand: “There are vast deposits of lithium in the world.”
That factoid doesn’t need debate. But let’s not confuse terms like “deposits” and “resources” with “reserves” and “production.”
Like lithium, the earth holds equally vast resources of crude oil and all sorts of other raw materials too. The human challenge has always been exploring for these resources and recognizing how much of them are technically recoverable reserves. Then comes the difficult part: permitting, financing and building the operational infrastructure to produce the reserves and bring them to market in a responsible, safe, and consistent manner at affordable prices to the consumer.
Anyone in the resource extraction business knows there are significant lags, measured in years, between turning resources into reserves and then into production. Greenfield projects often require billions of dollars to establish operations, roads, loading facilities, power lines, distribution channels and other supply infrastructure.
Then there are the “above ground” problems. Much of the world’s plentiful battery minerals are buried under the same nastiness as oil: State meddling, corruption, civil unrest and opacity to name a few business risks. For example, 60 percent of the world’s current cobalt supply comes from the Democratic Republic of Congo (DRC), a country that is in the same distinguished peer group for business risk as Syria, Iraq and Somalia; Transparency International, a global anti-corruption agency, ranks the DRC as number 156th of 176 in terms of corruption (Canada is ninth if you are wondering).
Yet, the biggest issue of scalability comes from the demand side. There is a double whammy looming. The number of battery units demanded is projected to grow aggressively; and the size of the units is getting bigger too. On this latter point, the historical progression of modern electrical storage goes something like: Watch batteries, cell phones, power tools, lawn mowers, scooters and now cars. Each step up in capacity has been at least an order of magnitude larger (10x) than the last.
So the demand for battery minerals will need to grow even faster than the forecasts for the number of units.
By contrast, oil-powered combustion engines were introduced in a reverse, declining scale progression: Large-scale marine engines, railroad locomotives, farm equipment and then cars. Soon after came smaller lawn mowers and tiny hobby engines.
A 50-year history of building out global supply chains, combined with a downward scale progression in devices, were big reasons why companies like Standard Oil were able to encourage the adoption of cars like the Model T in the early years.
Of course not all batteries are made of the same materials, but increasingly the lithium-ion construct is becoming a dominant design standard. Switching out manufacturing processes and supply chains are costly once they are established.
The nascent battery-EV industry must acknowledge their looming upstream resource issues otherwise their aggressive adoption forecasts cannot be taken seriously.
Minerals like lithium and cobalt may indeed be the new oil, especially from an upstream perspective. Ratcheting up the demand for raw materials faster than the earth can deliver leads to skyrocketing commodity prices, geopolitical fighting and environmental dereliction to name a few industrial ills. For an example of that lesson, look back to the oil business in the 1970s.
AVZ Price at posting:
8.8¢ Sentiment: Buy Disclosure: Held
