Lithium shortages loom as demand looks to far outpace supply.
The electrification of transportation is widely accepted as fundamental to achieving global decarbonization. With current battery technology, lithium is both the rate and cost determining factor in the manufacturing of the millions of batteries needed to power that transition. Economically viable lithium production, however, is concentrated in only a few global geographies, and massive investment will be needed to increase output if electric vehicle production is ever to match demand.
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No change in fundamental technology has ever been so widely predicted and legislatively driven as has been the shift from internal combustion engines to electric drive. Every major automotive manufacturer on the planet is either producing electric vehicles or rapidly tooling up to do so, and several jurisdictions have taken active measures to ensure that consumers buy the product.
Recent U.S. legislation includes considerable incentives for purchasers of EV’s, and incentives for firms to build them—and the phenomenon is worldwide. One Australian bank has gone so far as to stop providing new car loans for fossil fuel cars starting in 2025. Several nations have proposed the prohibition of sales of gasoline and diesel vehicles in the 2030 to 2035 timeframe.
That is a rapid transition, about half the average life expectancy of a modern internal combustion engine vehicle, and the automotive industry will be hard-pressed to deliver the necessary number of vehicles.
While large reserves of the metal are located in Australia, Chile and the Congo, over half of lithium processing and refining capacity is located in China.
The numbers are stark. According to the IEA, 60% of new vehicle sales in 2030 will be electric to help meet net-zero CO2 targets for 2050. But even if electric vehicle sales are only half that number at 30 percent, the demand for lithium will increase globally by six times, up to 2 million tons annually by 2030. New battery technology promises to reduce the need for other critical materials such as nickel and cobalt, but lithium remains the weakest link in the chain.
For automakers, the global war for lithium now requires end users of the raw material to choose long-term supply contracts, both to feed joint venture battery making operations and to backstop production rates for Tier 1 suppliers. Not since Henry Ford invested in iron ore and latex production to feed his assembly lines a century ago have automotive OEMs been forced all the way up to the source of the supply chain.
Batteries are the determining factor in electric vehicle pricing, and with economies of scale, battery prices have been falling, dropping six percent per kilowatt hour in 2021 compared to 2020, but that decline is slowing. According to the IEA, if lithium prices in 2022 remain as high as they were in the first quarter, battery packs will be 15 percent more expensive than they were last year, all else being equal.
Electric vehicles will become more expensive. Can consumers afford them, even if they are motivated to buy? Government incentives will shield auto buyers from factors such as high lithium prices in the short term, but only more metal, very quickly, will deliver cost parity with internal combustion engines by the end of the decade.