Lithium Supply Crisis Hampers Energy Transition Efforts

Lithium, which has become crucial in the world’s efforts of energy transition, is on the verge of a crisis as demand has outstripped supply, driving prices up almost 500% in a year.

The shortage of lithium is so critical that China, which makes around 80% of the world’s lithium-ion batteries, pushed suppliers and manufacturers to demand a rational return to lower prices. Price forecasts for the battery metal is nearly doubled for 2022, and an extreme rally is on the cards.

The failure to produce more lithium would be highly problematic. Global investment in electric vehicles (EVs) has grown faster than any other new energy sector in the past few years, even surpassing solar and wind. Current lithium spot prices could add up to $1,000 to the cost of a new vehicle. Along with higher prices of other raw materials, that is reversing years of falling prices as EVs race to become cost-competitive with combustion engine cars. If battery makers can’t get enough lithium, it would curb the expansion of clean-energy vehicles, making it harder to meet global emissions targets.

The increase in lithium mining expansions is not expected to be enough to reach demand over the next three years.

Some EV makers including Tesla, China’s BYD Co., Xpeng Inc. and Li Auto Inc. have already raised sticker prices, as has CATL, the world’s biggest EV battery maker.

Part of the soaring lithium prices is because of a slump in 2018-2020 that halved its value, causing chronic underinvestment in new sources of supply just as EV demand was taking off. For battery makers, those woes have been compounded by the pandemic and Russia’s war in Ukraine, which have snarled supplies of other ingredients they need, including nickel, graphite and cobalt.

Supply crunch and higher prices have resulted in a wave of acquisitions and joint ventures as battery makers and automakers try to secure supplies. They also unleashed resource nationalism among governments. Lithium has become a strategic mineral, and faces rising government intervention.

EVs and batteries drew $271 billion and $7.9 billion of investment respectively in 2021. However, the upstream part of the value chain has attracted relatively low investment over the last five years.

The quickest way to increase lithium supply is to ramp up output from the existing sources. Ganfeng Lithium, one of the world’s largest producers, said it’ll use profits to increase production. Australia’s Pilbara Minerals aims to expand its Pilgangoora mine in Western Australia and raise production capacity more than 50% by September.

One longer-term solution is to find new deposits. But it takes years to develop a new mine and, in some countries, the process is becoming more difficult due to resistance from local communities.

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