Australia's potential in the lithium marketMcKinsey & Company...

Australia's potential in the lithium market
McKinsey & Company June 9 2023

The key takeaway was Perth has the potential to become a leading future lithium knowledge centre:

"By 2030, based on currently announced capacities, about 14 percent of global lithium hydroxide production will occur in the greater Perth area. That would be a meaningful concentration of human capital, which the Australian industry might capitalize on to develop a leading knowledge center for lithium hydroxide. That step could attract investment, which would in turn generate further knowledge in the space."

I believe this $10 billion opportunity is what HP et al. are after. From the report:

https://www.mckinsey.com/industries/metals-and-mining/our-insights/australias-potential-in-the-lithium-market#/

Australia’s lithium hydroxide opportunity

Global demand for lithium is expected to grow strongly through the 2030s and beyond: although the chemical composition of EV and non-EV batteries varies, lithium is included in all compositions. If Australia were to extend its lithium extraction into refining, that would lead to new revenues and margins—and contribute to national income and employment.

Rising global demand for lithium

Lithium is expected to remain the primary raw material for batteries for the foreseeable future. Historically, battery technology relied on lithium carbonate. More recently, better-performing high-nickel NMC batteries (composed of lithium nickel manganese cobalt oxide), which instead rely on lithium hydroxide, have been introduced. Accordingly, demand for lithium hydroxide is on the rise as EV producers increasingly shift to using high-nickel NMC batteries. Our analysis shows demand for lithium hydroxide to be higher than lithium carbonate by 2030 (Exhibit 2). Most of the future battery technologies, which are currently in early stages of development, also require lithium in various chemical forms.5

Australia, a major producer of spodumene, has commenced lithium hydroxide production

Four countries—Australia, Chile, China, and Argentina—hold 76 percent of the world’s lithium reserves.8 Australia’s lithium reserves (among the highest grades globally) are extracted through hard-rock mining and the ore processed into spodumene, which can then be refined into either lithium hydroxide or lithium carbonate (lithium hydroxide is the preferred route because refining from spodumene is less complex and cheaper than refining lithium carbonate from spodumene). Most South American lithium reserves are brine, which is extracted through heavily water-dependent evaporation ponds. This raw material is predominantly converted into lithium carbonate (because of the greater complexity and cost of conversion to lithium hydroxide). China relies on both extraction methods.

While Australia accounted for 43 percent of global lithium extraction in 2022 (almost all exported to China), it has only just started processing spodumene into the more valuable lithium hydroxide. China, in contrast, accounts for just 17 percent of global lithium extraction, but for 77 percent of global lithium hydroxide refining.9

Lithium miners in Australia are now seeking to close that gap. Two major global lithium ore miners operating in Australia—China-owned Tianqi and US-owned Albemarle—have both invested in refining plants with Australian joint venture partners (respectively, IGO Limited and Mineral Resources Limited).10 In 2022, Tianqi launched Australia’s first battery-grade lithium hydroxide plant at Kwinana, with total planned capacity of 100 kilotons of lithium hydroxide per year (current capacity is 24 kilotons per year), and Albemarle is commissioning a similar-size plant at Kemerton (current capacity, 50 kilotons per year).

Lithium hydroxide represents up to a $10 billion opportunity for participants, coupled with strong rates of return

By 2030, these and other planned Australian lithium hydroxide plants are expected to produce approximately 234 kilotons of LCE of lithium hydroxide annually, from a projected approximately 716 kilotons of LCE of spodumene.11 Refining the remaining approximately 480 kilotons of LCE of spodumene represents Australia’s lithium hydroxide opportunity, with prospective measurable benefits in revenues, margins, and employment.

In a scenario where lithium hydroxide is valued at $10 to $20 per kilogram of LCE more than spodumene in 2030, revenues could rise by approximately $4.8 to $9.6 billion. A more promising revenue scenario may also emerge at the significantly higher 70 to 85 percent margins available to integrated refineries, compared with the 40 to 60 percent margins available to nonintegrated global refiners.12 Our analysis suggests producing lithium hydroxide at these levels may also create up to 18,000 temporary construction jobs, and 4,000 permanent operational jobs, by 2030.13

Our analysis also suggests that existing Australian lithium hydroxide refiners could achieve internal rates of return (IRRs) of about 29 to 36 percent (assuming the LCE price in perpetuity is the analyst consensus average of approximately $24 per kilogram of LCE). Even with the assumption that the LCE price in perpetuity is as low as approximately $15 per kilogram of LCE, the IRR would be 12 to 21 percent, which may still merit consideration by prospective participants.

Four potential advantages for Australia from expanded lithium hydroxide production

If Australia does choose to refine its available spodumene into lithium hydroxide, four factors could play into any decision. First, the combination of hard-rock lithium reserves and integrated refining could give Australia a strong cost advantage in the eyes of global customers. Second, Australia could become an attractive supplier to multiple markets under free trade agreements and other legislative initiatives. Third, the Australian industry can draw on the developing renewable energy industry to offer low-emission production to a decarbonizing world. Finally, Australia could build and leverage its lithium knowledge base through its lithium production and refining.

Low-cost, reliable supply

Australian refineries could benefit from reduced transport and energy costs. If those refineries are integrated with mining operations, participants will also benefit from cheaper raw materials (because they will not need to pay market prices for spodumene). As a result, our modeling suggests that Australia could produce lithium hydroxide at approximately $6,600 per ton of LCE (assuming integration with lithium mining), compared with $10,400 per ton of LCE for China (Exhibit 4). Indeed, South Korea and Canada, the closest countries to Australia from a cost perspective, still have costs approximately 24 to 51 percent higher than Australia’s. In addition, Australian plants would have the strategic advantage of a secure raw-materials supply.

Favored status for the growing US market

Two factors suggest Australia and the United States could become stronger trading partners in lithium hydroxide production. First, the United States is expected to be the third largest market for lithium hydroxide by 2030, accounting for an expected 11 percent, or 0.34 million metric tons of LCE, of the expected global demand noted earlier. Second, the 2022 US Inflation Reduction Act (IRA) offers eligible EV purchasers up to $7,500 in tax credits.14 However, the law stipulates that the battery and EV manufacturers source at least 40 percent of battery minerals locally or from free trade agreement (FTA) countries, rising to 80 percent by 2027.

Australia is particularly well placed to meet US market needs. While Canada and Chile are also FTA countries, Australia can deliver lithium hydroxide at the lowest cost. Chile’s brine lithium extraction produces mainly lithium carbonate, whereas Canada’s production cost is expected to be $10,400 per ton of LCE, more than 58 percent higher than Australia’s.

Low-emission lithium hydroxide for a decarbonizing world

By 2030, raw materials are expected to constitute 25 to 40 percent of battery Scope 3 emissions, and both battery and EV manufacturers will seek to meet ambitious decarbonization targets. As a result, annual demand for low-emission lithium hydroxide may grow from effectively zero today to 0.7 million metric tons of LCE. Assuming an equilibrium or undersupply, we forecast a price premium of approximately 4 to 5 percent over the commodity lithium price for low-emission lithium hydroxide.

Typically, the carbon footprint of hard-rock mining is about 2.5 times that of brine operations. However, Australia can overcome that deficit with lower-emission energy sources. Using coal-fired power, roasting hard-rock lithium generates approximately 9.6 tons of carbon dioxide per ton of LCE. Australia’s new refining plants will instead use gas, which could reduce total mining and refining emissions by approximately 50 percent, bringing it almost in line with brine operations emissions. Future innovation may allow plants to power the roasting process with green hydrogen, drawing on the abundant renewable energy that can be co-located at all lithium hydroxide plant sites.

Leading future lithium knowledge center

By 2030, based on currently announced capacities, about 14 percent of global lithium hydroxide production will occur in the greater Perth area. That would be a meaningful concentration of human capital, which the Australian industry might capitalize on to develop a leading knowledge center for lithium hydroxide. That step could attract investment, which would in turn generate further knowledge in the space.