A great article from Matt Fernley the MD of Battery Materials Review, highlighting the upcoming critical supply issue in battery materials - https://www.linkedin.com/pulse/why-global-automakers-battery-strategies-fatally-matt-fernley/
VW are talking about moving further into the supply chain and investing in miners. It's clear they better get their act together soon!
Sorry for the word dump but some key points below.
Not enough capital going into Raw Materials
The problem that we’re facing here is that the magnitude of growth in these markets is huge. We forecast that the size of the global lithium market will increase by seven times over the next 10 years. There is a similar issue in other key materials such as graphite and high purity manganese. The industry is adding a lot of capacity. But not enough to get ahead of these structural changes in demand.
But the issue is they’re not going far enough back along the supply chain. It takes two to three years to build and optimise a battery factory or an EV plant. But it takes between five and ten years to build and optimise a mine. And currently the EV sector is raising capital at rates of over 10x the rate that the raw materials sector is raising capital.
There has been a huge under-investment in raw materials capacity over an extended period. Activity has picked up this year, but it’s still laggin
The bottom line is that unless projects start getting funded very soon, there is going to be an extended and substantial market deficit.And what happens in a market deficit? Raw material prices rise. And they carry on rising. The 100% that lithium prices have risen in the past 12 months is nothing. Last year we conducted an analysis of pricing behaviour in previous secular demand events, and we concluded that raw materials prices could rise between four and six times from trough levels in an extremely undersupplied market.
Offtake is NOT enough
There have been quite a few offtake announcements over the past 2-3 months and I’m sure a lot of OEMs are clapping themselves on the back that they’ve locked up tonnage.
The first issue is – have they actually locked up tonnage? Most of the lithium agreements are not over producing assets. They’re over development assets. The reason that they’re over development assets is that Western World automakers have spent so long messing around that all the offtake is tied up for producing assets and the expansions of those assets.
Now I’ve been a mining analyst for over 20 years and I can count on the fingers of one hand the number of development projects that came into production on time! Particularly the ones that used new technology that had never been used in the market before (like direct extraction of geothermal brines). Will those assets be in production on time? I don’t know. No-one does. But my past experience suggests that they will probably be late.
The other issue is that it’s one thing to lock up tonnage. But what price are you going to pay for material? Because no mining management team worth its salt will commit to a fixed price contract with the market as it currently is. So yes, the OEMs locked in tonnage so their battery factories can source the material to keep working. But is it going to be economic for the battery factories or the OEMs to keep working given what the price is likely to be?
My gut feeling is – “no”. And that’s why I believe that the auto industry’s approach to the battery supply chain is fatally flawed. They’ve taken too long to act. Nothing can change that. But now that they’re acting it’s not enough to lock in offtake agreements. They need to be making capital available to finance new projects at all levels of the industry.
Auto makers have got this WRONG
In my view the only thing likely to hold back EV sales will be battery raw material availability and hence battery costs. If the OEMs can raise money at the rate they’ve shown they can in the last three years, then they need to start throwing it at raw materials projects as soon as possible.
It doesn’t matter to the OEMs if too many projects get funded. In fact, it’s in their interest if they do. Only oversupply in battery materials will push prices back down. That’s at least five years away. And it could be longer.
OEMs need to start acting now to actually finance raw materials projects. If they don’t, there may very well not be an EV industry by the end of this decade
(20min delay)