Lithium sector is struggling to solveits big problemBullish new...

Lithium sector is struggling to solveits big problem

Bullish new forecasts forlithium demand have coincided with setbacks to new supply projects. That’sultimately good for prices, but not for the electric vehicle sector’s bigambitions

It’s unlikely that many Australianinvestors are following the recent travels of chancellor Olaf Scholz. But histrip to South America in recent days underscores a new front in the global racefor arguably the world’s hottest commodity: lithium.

Scholz signed an agreement with Argentina that is designed tohelp German industry secure lithium supplies from the South American giant. OnSunday, the chancellor was in Chile, the world’s second-largest supplier oflithium after Australia, seeking a similar deal.

Currently, the bulk of the world’s lithium chemicals are scoopedup by China’s battery manufacturing sector. But Germany – home to car giantssuch as VW, which wants to invest $80 billion in electric vehicles between nowand 2026 – needs a slice of that action.

More broadly, Scholz’s trip again highlights questions over thesize of the gap between lithium supply and demand, and how and when it will getfilled.

The surge in ASX-listed lithium stocks since the start of the year – Pilbara Minerals is up 35 per cent year to date, Mineral Resources is up 23 per cent and Liontown Resources is up 32 per cent – speaks in part to a return to the global burst of speculative bullishness, and in part to a new data suggesting lithium demand over the next decade could be even stronger than expected

Lastweek, US-based lithium giant Albemarle lifted its forecasts forlithium demand by about 15 per cent, putting demand at 1.8 million tonnes and demand in 2025 and at 3.7 million tonnes in 2030, up from 0.8 million tonnes in 2022.

Thebiggest swing factor: electric vehicles

TheBiden administration’s Inflation Reduction Act, which includes big incentivesfor renewable energy including batteries, has contributed to Albemarle’s newdemand estimate.

But thebiggest swing factor is sharply rising electric vehicle production, whichAlbemarle expects will leap from 11.2 million units in 2022 to 15.7 million in2023, and to 46.9 million by 2030.

(Interestingly,Citi believes demand in Australia for EVs is set to grow in 2023 thanks to thefederal government’s new Electric Car Discount, which the bank believes has thepotential to add as much as 11 per cent upside to novated leasing volumes,given the spike of EV-related inquiries fleet managers have reported.)

Albemarle’snew lithium demand estimate is seen as bullish by some commentators. Respectedresearch house Benchmark Intelligence has a base case for demand of 2.4 milliontonnes in 2030.

Butchief executive Simon Moores points out that even at this more modest level ofdemand, supply is likely to remain short, given Benchmark’s base case forsupply in 2030 is 2.1 million tonnes.

Eventhat 12.5 per cent gap between supply and demand is the equivalent of at leastsix lithium mines, and 50 per cent the size of the entire industry in 2022.

ButMoore describes the 54 per cent gap between Benchmark’s base case for supplyand Albemarle’s bullish view of demand as “the difference between automotive EVdreams and the reality of what the industry can likely achieve”.

Minersstruggling with demand

Indeed,the difficulties in closing the supply gap have been highlighted and appear tobe growing. While analysts expect supply of lithium to increase by between 20per cent and 40 per cent in 2023, miners are already struggling to meet theirproduction plans.

Macquariesays that over the last two months, four ASX-listed lithium companies have“announced setbacks to their respective projects, reflected in either a highercapital budget or a delay of commissioning”.

LiontownResources has increased the forecast capital budget for its Kathleen Valley by64 per cent, with Macquarie warning “scheduling risk remains”.

InDecember, Pilbara Minerals increased the budget for one of its expansionprojects by 36 per cent. Allkem recently announced a delay with its Sal DeVida. And last week, Mineral Resources announced delays to the expansion of itsMount Marion project, which has been pushed back six months.

Ofcourse, the delays at Mineral Resources haven’tstopped the company’s shares from testing record levels. And at an individual company level, Macquaire sees a silver lining to these supply challenges.

“Supplyresponse will lag demand, resulting in a market deficit and elevated lithiumprices. In addition, we believe the capex upgrades could also shift the costcurve upward, translating to higher lithium prices in the long term.”

But forthe EV industry, and the world’s emissions reduction goals, the challenges inclosing this supply gap are not going away. As Moores says, it won’t be easytaking the lithium and EV sectors from start-up mode to scale-up mode.