Where will the Lithium, Graphite And Cobalt For The Battery Revolution Come from?
March 24, 201, Simon Moores
http://b4in.com/aLzp
Following the lead of Tesla Motors, LG Chem, Foxconn and others are racing to build megafactories to build batteries for electric cars. Yet even now the world supply of graphite, lithium and cobalt needed to supply these factories is insufficient. In this interview with The Mining Report, Simon Moores, managing director of Benchmark Mineral Intelligence, explains that we can soon expect healthy prices for all three metals, but the juniors that will succeed in the market must first and foremost learn to meet the needs of the end users.
Electric car charging
The Mining Report: You have said, "Electrification of transport will not succeed unless the world has cheap, abundant, longer-lasting batteries." What are the obstacles to obtaining such batteries?
Simon Moores: There are a number. The first is the scaling of battery supply. The megafactories will be needed to drive down costs significantly. Tesla Motors Inc., LG Chem Ltd. , Boston-Power Inc., Foxconn Technology Group and, most recently, Chinese electric vehicle producer BYD have all announced plans to build them. Meanwhile majors like Samsung SDI have announced significant expansions of existing operations. The battery industry is preparing for a surge in demand and its next phase of growth.
But these megafactories will need assured quality raw materials, which is the second obstacle. The third is the security of supply for raw materials. This last obstacle is overlooked at the moment, as the battery industry is taking it as a given they will have supply as needed. But when megafactories come on line, demand will soar. Therefore, supply visibility all the way upstream to the mine is crucial to their success. This is what Benchmark specializes in.
TMR: How does the oil price collapse affect current and future demand for battery power?
SM: This is the question everyone's asking. Without a doubt, a halved oil price has a negative impact on those consumers who want electric vehicles (EVs) in order to save money on gasoline. To be honest, though, the success of Tesla raises the question of how many people are buying EVs for economic reasons today.
Regardless of the short-term effect, I don't think the oil price collapse will have a long-term impact. I see internal combustion engines and EVs as fundamentally different technologies. Once EVs mature, they will be far more efficient and software-driven than cars powered by internal combustion engines. I actually believe that you will get to a stage where a remote software upgrade will improve the cars' performance. You are already seeing this with Tesla. Once you reach this stage, the vehicles will actually improve over time—in essence, cars will no longer be a depreciating asset.
TMR: Would you say that Tesla has a fundamentally different target audience than Toyota Motor Corp.'s Prius?
SM: Definitely. The Prius was created and priced for the mass market from day one. At the time "green" and "cool" did not go hand in hand, so many early Prius owners had to live with an eco-label. The car has since proven to be one of the most economical and best overall models on the road. People now have forgotten about the fact that it is a hybrid and it has been accepted in today's world.
Whereas the Prius took years to shake off the green label, Tesla has made its cars desirable from day one on the basis of performance and design. Tesla has made EVs desirable. The fact its electric is now secondary.
Tesla's Model S is a quality super car, rather than just a functional vehicle. It has achieved something in EVs similar to the "Apple effect" on consumer electronics. The biggest challenge is yet to come, however, as Tesla now wants to shift this success to the mass market with its Model III launch in 2017—a car that will be powered by Gigafactory batteries.
TMR: We've heard that Apple Inc. is about to enter the EV market. How important would that be?
SM: It hasn't actually announced anything yet. But the rumor that Apple is getting into the self-driving EV space is supported by a lawsuit filed by A123 Systems Inc. (AONE:NASDAQ), a U.S.-based lithium-ion battery producer, which claims Apple is poaching its staff. As for the possible importance, well, if you thought Tesla was a game-changer, then Apple is another thing entirely.
I was at first surprised by the rumor, but it really makes sense. Apple has $178 billion ($178B) in cash and nowhere to spend it. It has already disrupted the consumer goods market, and now it needs another huge global market ripe for disruption.
TMR: China intends to become the world's biggest EV market by 2016. What are the long-term implications of this for battery-production growth?
SM: In short, we need more batteries. China's EV market has already shown exponential growth. In January 2014, about 600 EVs were sold. In December 2014, that number had risen to about 27,000, almost 30 times as many.
It's too soon to say whether this is a trend, but it does show how hard it is to forecast new markets and how they can creep up on you.
TMR: Is China's massive expansion of the EV market a top-down directive, or is it market driven?
SM: A bit of both. It does come from the top, as China's urban pollution is so bad that clean vehicles are essential. But the Chinese are business savvy, and they're not going to waste a lot of money producing vehicles without a return.
The electric bike market in China shows that it's a fundamentally different market than anywhere in the world. The Chinese don't have to be persuaded on switching gasoline for electric—they are far less in love with cars than the West. It's more of a cost proposition.
TMR: What's the optimum price point for the widespread adoption of electric vehicles? Is it $50,000, $40,000, $30,000? Lower?
SM: Mass-market EVs need a price that can more than compete against gas powered vehicles. Tesla and General Motors Inc.have both said that they're aiming for a sub-$35,000 car in 2017 (in 2017 dollars). If they can make EVs profitable at under $30,000, we could see a market shift, with EVs becoming genuinely popular with consumers in all income levels.
The only way you can achieve this is by producing cars, batteries and raw materials through economies of scale.
TMR: Since 2008, economic growth worldwide has hardly been robust. Has this slowed the shift to EVs?
SM: It has because consumers haven't had the money to spend on them, and they are at present deemed niche or luxury vehicles. For manufacturers, they are more of a PR concept than an actual business proposition.
A weak global economy has also meant that these auto manufacturers haven't been willing to invest the money in R&D to really innovate their cars or improve their batteries. Nissan Motor Co. Ltd.'s Leaf came out in 2010, and we haven't seen much from the traditional manufacturers since.
This gave a window of opportunity for someone to steal the limelight. Progress in EVs is now being led by a disruptor, Tesla, which designs and sells EVs in a completely new way. That's the upside to a poor economic situation.
TMR: The shift in the U.S. to more efficient, less-polluting cars was driven by government mandates from Washington and from individual states, California in particular. Could we see similar mandates with regards to EVs, with U.S. governments requiring X percent of manufacturers' fleets to be electric?
SM: Such mandates would obviously have a very positive medium-term impact on the EV space because they would guarantee sales. Ultimately, however, EV producers can't rely on governments. They need to build vehicles that can compete in quality and price with the vehicles that the average person buys.
TMR: The three metals key to increased battery production are graphite, cobalt and lithium. How is each placed to meet increasing demand?
SM: I'll consider them individually and start with graphite. The problem here is the ability to produce spherical graphite, which is used to make the anode in the EV battery. Currently, 95+% of the world's spherical graphite uncoated comes from China. There is no diversification in supply. You can also use synthetic graphite in batteries, so you have a substitution option here. At Benchmark we estimate that there is about a 50/50 split for natural versus synthetic used in batteries.
Lithium is better placed as the battery market has been the number one consumer for the last five years. But the volume of battery-grade lithium isn't sufficient to supply the megafactories that are planned for the near future. For example, lithium hydroxide, which is also used in batteries along with the more familiar lithium carbonate, has been neglected and is likely to see a squeeze in demand this year. In the long run, however, I expect, that this capacity issue will be corrected.
Cobalt has an even bigger upstream problem than the first two, because 55% of the world's cobalt now comes from the Democratic Republic of the Congo. In the rest of the world, there's a selection of very small producers, and their output is overwhelmingly a byproduct.
All three of these industries are structurally inflexible to any major demand shocks. That is something buyers must be aware of.
TMR: We began by talking about cheap, abundant, longer-lasting batteries. Now, even with megafactory economies of scale, wouldn't the huge quantities of graphite, lithium and cobalt needed for them drive up prices of both the metals and the batteries?
SM: Yes. If the megafactories come on stream in the next two years with little change in the raw material supply, prices will rise and impact the cost of the battery. Currently, the battery industry and the people who supply the raw materials are not working together. There is a disconnect in the supply chain.
Those who are planning these megafactories need to get visibility all the way upstream to the mine. At the moment, they look only for the cathode and anode materials, which they regard as raw materials but are really semi-processed products.
TMR: You've argued that we have likely seen "peak graphite supply" in China. Will this result in a race to new production outside China?
SM: I think we're already seeing that from the juniors and from some private companies. The world is too dependent on China for battery-grade graphite and needs supply diversification if batteries are going to fulfill the potential of being a new, major global industry.
TMR: How will this new boom in graphite compare to the boom of five years ago?
SM: Back in 2010, the boom was all about the resource: the location, its size and the size of the flakes. Now the industry has matured. The juniors now know that success, in the main, requires three things. First, they need a good-quality resource. Second, they need clear goals in sales, marketing and processing. Third, they need a profitable selling price on a par with the Chinese export price for graphite. Medium-flake graphite exported from China sells now for about $1,000 per ton. Large-flake graphite of 94–95% carbon sells for about $1,250 per ton. If the juniors can compete with those prices or the prices of semi-processed products, such as spherical graphite, they'll have a great chance of success.
TMR: Would you comment on the prospects of specific juniors with regard to meeting the increasing demand for graphite?
SM: At Benchmark we don't endorse or invest in any junior stocks. We view the industry from our independent perspective in relation to predicting when new supply will be coming into the market. There have been a number of recent news developments in this sector.
Many people have been talking about Syrah Resources Ltd. and its Balama project in Mozambique. The company signed an 80,000 ton offtake deal with Chalieco, a subsidiary of Chinalco, to sell into the aluminum industry. This is a new market for flake graphite that shows that China is looking to lock up foreign raw material. The company also announced preliminary plans to establish two spherical graphite plants in Africa and the U.S., which shows its intention to position itself for supplying a surge in battery production.
In February 2015, Energizer Resources Inc. released its Bankable Feasibility Study (BFS) for its Molo flake graphite deposit in Mozambique that it has been progressing for some time. The BFS outlines the costs for the project and shows that the new generation of projects can compete on cost with China.
Focus Graphite, which has the Lac Knife project in Quebec, has done much testing on coated spherical graphite. This is an example of having a strategy beyond the resource and looking at serving a market from the user perspective. It is also another company that is looking to capitalize a battery sector that is evolving.
Northern Graphite Corporation is another one of only a handful of companies that have created battery-grade spherical graphite sourced from its Bissett Creek project in Canada. It is positioning itself to serve this market, but also in its March 2 press release reminded the industry of its intention to serve existing industrial sectors of refractories and expandable graphite.
Canada Carbon Inc. has three graphite projects in Quebec, including two past-producing mines. The company has been doing work on the Miller project and is going down the high-purity graphite route. Canada Carbon is finding a niche in the graphite space and this gives it several options, such as nuclear-grade graphite or other specialist markets.
From a fundraising perspective, Mason Graphite Inc. with its Lac Gueret project in Quebec, has been active in a very tough market. I was in Vancouver in February, and the consensus was that we could be in the worst slump of all time, certainly if it continues for another 18 months. To raise money for a niche mineral in this environment is an achievement.
Great Lakes Graphite has been focusing recently on launching Great Lakes Innovations, the company that is investing in the restart of a micronization facility. The plant has a capacity to produce 10,000 tonnes of product and gives the company value added capabilities to go with its Lochaber project 30 kilometers from Ottawa.
Finally, from Graphite One Resources Inc. the industry is awaiting the release of its first preliminary economic assessment (PEA), which is expected mid-2015 and will give a clear picture of how the company can position itself in the growth markets. The company has also just updated its resource estimate on the Graphite Creek project in Alaska in a build up to the PEA announcement.
From the active producers' side, there is GK, Graphit Kropfmühl, which is owned by AMG Mining AG, one of the world's major processors of graphite and producers of specialist graphite products. The company recently sold a 30% stake to private investors, and the impetus from this deal will push GK into the new graphite markets.
At the end of 2014, U.S.-based Asbury Carbons Inc. (privately held) officially opened its graphite and carbon plant in Europe. The plant in the Netherlands is a major investment for the company as it extends its presence for the first time outside of North America. This foothold in Europe will mature in the next 18 months and will be one to watch.
Flinders Resources Ltd. is actually producing now from its Woxna graphite mine in Sweden. It has a very different challenge to those not in production and that is to actually sell product into the market, negotiate contracts and find new customers. Flinders is Europe's first flake graphite mine since the late 1990s and in essence doubles the continent's capacity to around 20,000 tons per annum.
StratMin Global Resources Plc (STGR:AIM) was the only other junior company that graduated into production last year. The company is now selling flake graphite to customers and in February sold +80 (large flake) and +50 (extra large flake) to the global market.
Australia's Valence Industries Ltd. has restarted the Uley flake graphite plant and is now producing from stockpiles. The company announced recently it has signed a number of contacts for a total of 8,000 tonnes. The product ranges from extra-large +35 mesh to fine powder of -300 mesh.
TMR: If you compare the graphite industry with the gold industry, gold is pretty simple. Does the market understand the complexity of the problems involved with graphite, the questions of flake type, flake size, purity, type of product and the necessity of offtakes?
SM: Much of the market probably doesn't understand it yet. But the more advanced and more experienced juniors do. Many of these companies have spent the last three years working closely with end users to develop their projects, and this close connection to the end market, especially with regard to specialist graphite products, is critical. This is a make-or-break issue.
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