Be careful with the explosion in lithium prices

Over the past year, Benchmark Mineral Intelligence’s flagship lithium indices have progressed very quickly. (Photo: 123RF)

GEOPOLITICAL ANALYSIS. The explosion in lithium prices has been impressive for a year, and it has something to make current and future producers of this strategic mineral in the energy transition smile. On the other hand, we must remain cautious in the face of this phenomenon, because anything that rises quickly can come down quickly.

Thus, companies whose business strategy relies on permanently high lithium prices take certain risks.

Lithium is an essential input for manufacturing batteries for electric cars, demand for which is rising sharply around the world, from Asia to North America via Europe.

This demand therefore draws the value of the inputs of these vehicles, including lithium, a mineral found in large quantities in Quebec, Australia and South America – in a triangle formed by Argentina, Chile and from Brazil.

To measure the magnitude of these increases, let’s take a close look at the indices compiled by Benchmark Mineral Intelligence, an industry benchmark. The firm has three flagship indices, the lithium index, the lithium carbonate index and the lithium hydroxide index.

The progression of these three indices is impressive, as you can see:

  • Lithium: increase for a month (35.3%), increase for a year (344.9%)
  • Carbonate: increase for a month (34.6%), increase for a year (401.7%)
  • Hydroxide: increase for a month (36.1%), increase for a year (297%)

At the beginning of the year, stimulated by the demand for electric cars, lithium carbonate even crossed the threshold of US$40,000 per metric ton, according to Benchmark Mineral Intelligence.

Why lithium prices are high

And this would only be the beginning, believes for its part the American investment firm Citigroup.

Recently, it has revised its forecast for lithium upwards, now expecting a price that could soon reach US$60,000 (or US$60 per kilogram), reports the Proactive Investors site.

The penetration of electric vehicles will reach 15% in 2025, and it will reach around 35% by 2030, according to the analysis firm Fastmarkets. (Photo: 123RF)

It must be said that electric car sales have also exploded around the world.

In 2021, they increased by 189% in China, by 157% in Europe (from January to September, all things considered) and by 94% in the United States, underlines Investing News Network (INN), citing analysts.

This trend should continue for the foreseeable future, according to the forecasts of analysts at Fastmarkets, a firm specializing in the analysis of natural resources and commodities.

“Demand for electric vehicles will continue to drive the lithium market forward: EV penetration will reach 15% in 2025, and we expect it to reach around 35% by 2030,” its analysts wrote in July.

This is not to mention the growing demand for applications such as energy storage (ESS), equipment for 5G and Internet of Things (IoT) infrastructure, in which lithium is also found.

Beware of the inevitable return of the pendulum

Currently, the demand is so strong that there are shortages of lithium salts in the world, underlines the Financial Times of London.

These high prices will necessarily encourage new players to embark on the exploration and production of lithium around the world, particularly in Quebec. And this additional offer will logically lower prices.

This is not the first time that we have witnessed a decline in prices after a surge.

From December 2017, lithium carbonate prices declined. They did not start to rise again until December 2020, and then began a rapid rise from August 2021.

The price of electric cars is also a factor to consider in the equation.

If lithium prices remain too high in the long term, the price of electric cars will also rise, making them less attractive to many consumers who would like to get rid of their gas-powered vehicles.

A situation that could reduce the demand for lithium…

Finally, we can’t get out of it, the price of the main metals (copper, zinc, steel, etc.) has been cyclical in history, as shown by data from the Our World in data site, from Oxford University.

Thus, with the exception of aluminum between 1850 and 2015, the main indices of base metals experienced a seesaw evolution.

Like what, any bullish cycle is the prelude to a bearish cycle, and so on.

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