• Is there a structural deficit between battery-grade supply and cathode demand
• Project delays, longer qualification times, and localization trends constrain battery-grade lithium supply growth
• Surging EV sales and energy storage demand will drive lithium consumption higher
• Suggests lithium prices need to be higher to incentivize required investment in new capacity
• Points to resilient spodumene prices and China spot levels as evidence of enduring tightness

Is the Lithium Deficit Structural and Here to Stay?

The lithium market is currently experiencing strong demand growth from electric vehicle adoption and energy storage installations. However, some analysts have warned about potential oversupply emerging. Structural deficits between battery-grade lithium supply and cathode demand are likely to persist. But investors should also consider potential risks that could ease tightness over time.

Battery-Grade Lithium is What Matters

When analyzing the lithium market, it is critical to differentiate between total lithium production and the subset of battery-grade lithium production specifically. Many analyses report on overall lithium supply and demand projections. However, the most important metric is battery-grade lithium supply versus the lithium demand coming from cathode production for lithium-ion batteries. This battery-grade subset is where structural deficits reside currently.

Lithium is used in many industrial applications, including ceramics, lubricating greases, glass, and air treatment. However, the rapid growth in electric vehicles and energy storage requires very high-purity lithium hydroxide or lithium carbonate. This battery-grade lithium goes through additional processing and more stringent quality control versus technical-grade material. It typically trades at premium pricing given the extra production costs.

Current total lithium production consists of both battery-grade and technical-grade output. However, with lithium-ion battery demand projected to surge at a 50%+ CAGR over the next decade, what matters most is specifically battery-grade supply versus cathode consumption. This is where persistent deficits are forecast going forward as demand outpaces supply.

Since incumbent lithium producers have drawn down inventories over the past two years, new battery-grade production must now match cathode requirements plus recycling streams to balance the market. Any imbalance leads to shortages or oversupply. The rapid growth in electric vehicles forces automakers to increase cathode output to produce more lithium-ion batteries. This quickly expands lithium demand from cathode and battery producers. But battery-grade lithium supply has lagged.

By distinguishing the battery-grade lithium subset rather than just total lithium, the root causes of structural deficits and pricing pressures become clearer. This distinction also explains why forecasts differ between industry experts closely tracking the battery supply chain dynamics and generalist analysts looking only at aggregate lithium numbers.

Project Delays Could Constrain Supply

While demand for battery-grade lithium is forecast to grow exponentially, production from new lithium mining projects faces risks of delays, which could limit supply growth.

Most new lithium mine capacity will come from greenfield projects rather than expansions of existing operations. However, Greenfield projects inevitably take longer vs. brownfield expansions. Permitting, construction, and ramping up production can all face unpredictable setbacks with new mines.

Even for projects that successfully reach commercial production, it takes significant time to qualify new lithium sources with cathode and battery manufacturers. It takes about 12-24 months to qualify new lithium sources for cathode producers. This means new mines cannot immediately realize full production, further delaying usable new supply to the market.

Additionally, many projected new lithium sources involve relatively untested processes. For example, recovering lithium from unconventional oil field brines or geothermal brines remains less proven from a commercial viability standpoint compared to conventional hard rock and brine projects. If these new production techniques encounter greater challenges than anticipated, it could also constrain supply growth relative to forecasts.

Any delays or setbacks in accelerating new projects will extend shortages in battery-grade lithium. While demand is spiking, analysts may be overestimating how quickly new mining capacity can realistically be brought online. Investors should factor in potential delays when assessing the pace of new supply growth.

Prices Probably Need to Rise

For the lithium market to reach a sustainable balance through the 2020s pricing will need to rise substantially to incentivize adequate investment in new mining capacity and conversion projects.

Recent pricing in the market for lithium spodumene concentrate provides an indication of why higher prices may be required. In November 2022, Pilbara Minerals sold 5.5% spodumene concentrate at over $8500/tonne on a shipped basis. Converting this pricing to lithium carbonate in China would result in costs of over RMB 300,000/tonne. This leaves little to no margin for lithium converter refineries at current market prices of around RMB 275,000/tonne.

The spodumene pricing suggests the economics are not viable currently for converters without integrated mining supply. For significant new investment to occur across both mining and refining, returns need to justify the capital outlays required. Based on an analysis of spodumene production costs and typical conversion costs pricing likely needs to rise to RMB 300,000/tonne or higher for converted lithium to provide adequate margins. Otherwise, there is insufficient incentive to scale up production to meet surging battery-grade lithium demand.

Sustained higher pricing also provides signals to incentivize more exploration spending to develop new resources. The lithium cost portion of total lithium-ion battery costs remains relatively small, so moderate lithium price increases are unlikely to curb battery demand growth materially. Hence, absent a demand shock, achieving a balanced lithium market through the 2020s will likely require pricing to rise to levels that support large capital investments across the entire lithium supply chain.

But Risks Exist of Oversupply Emerging

When assessing whether lithium market tightness is structural and enduring, it is important to also consider potential risks that could shift the supply/demand balance dynamics.

There remains uncertainty around future electric vehicle adoption rates globally. Most projections forecast continued rapid growth, but if global EV sales growth moderates due to economic downturns or changes in government subsidies, lithium demand increases could level off quicker than expected. For example, during recessions, consumers may pull back on discretionary purchases like electric vehicles. This would reduce forecasted lithium deficits.

Additionally, the new lithium mining capacity has the potential to come online faster than current projected timelines if projects accelerate. There are dozens of early-stage lithium projects in development globally across hard rock, brine and clay deposits. If a significant number of these new mines overcome obstacles and begin production ahead of schedule, it could boost the available lithium supply at a quicker pace than analysts currently expect. This could potentially loosen tight market conditions.

Furthermore, technical innovations that reduce the lithium intensity needed per lithium-ion battery could also temper demand growth for lithium. For instance, advancements in cathode chemistries to increase energy density may allow similar battery ranges with less lithium. While intensity reductions are likely to be gradual, they could nonetheless mute lithium demand growth relative to forecasts. Increasing amounts of recycled lithium re-entering the market supplement virgin lithium supply from mining. If recycling volumes accelerate faster than projected, this supplements mined lithium production. However, recycling economics remains challenging currently.

While the electric vehicle and lithium demand outlook appears robust, it is prudent to carefully analyze factors that could potentially ease tightness faster than anticipated. Supply and demand balances can shift rapidly in commodity markets. Weighing both bullish and bearish scenario risks allows investors to make informed assessments of the possible structure of the lithium market going forward.

Key Takeaways

• Battery-grade lithium demand is growing rapidly, outpacing current supply
• But new project delays could extend deficits, requiring higher prices
• Risks exist that could potentially ease shortages faster than expected
• Investors should examine both bull and bear case scenarios for lithium

Lithium Companies to Watch

Li-FT Power

Li-FT Power (CSE: LIFT) is a mineral exploration company focused on acquiring and developing lithium pegmatite projects in Canada. Their flagship Yellowknife Lithium Project in Northwest Territories contains 13 lithium pegmatite dykes near infrastructure and they have initiated a 45,000 meter drill program in 2023 to define resources. Li-FT also has the early-stage Cali Project in Northwest Territories within a historic lithium pegmatite belt and drilling is planned once permits are received. In Quebec, Li-FT has three large exploration properties near the Whabouchi deposit where 10 targets have been generated and initial drilling of two targets will occur in summer 2023 with more exploration planned for 2024. Overall, Li-FT is advancing a portfolio of Canadian lithium assets through systematic exploration and drilling.

American Lithium

American Lithium is developing large-scale lithium projects in Nevada and Peru as well as one of the world's biggest uranium projects, with the goal of playing a major role in the transition to sustainable energy. The company's core assets are the advanced-stage TLC lithium project in Nevada and Falchani lithium project in Peru, which have robust preliminary economic assessments. American Lithium also owns the Macusani uranium project in Peru, which has seen significant historical development. With assets at various stages of pre-feasibility and feasibility studies, American Lithium is positioned to be a major player in lithium and uranium mining.

Frontier Lithium

Frontier Lithium (TSX-V: FL) is a preproduction company focused on becoming a major domestic supplier of lithium in North America for the electric vehicle and energy storage markets. Its flagship PAK lithium project in Ontario contains the highest grade lithium resource in North America and is the second largest by size at over 27,000 hectares. The project has delineated two premium spodumene-bearing lithium deposits, PAK and Spark, as well as two other discoveries, Bolt and Pennock. A 2023 pre-feasibility study forecasts a 24-year project life with a post-tax NPV of $1.74 billion and 24.1% IRR based on producing spodumene concentrates and downstream lithium hydroxide. The project has significant potential for further exploration and resource expansion.