Demand for key rare earths used in electric vehicle batteries is higher than ever, while pandemic-driven shortages drive prices higher and increase government involvement.

Electric vehicle (EV) makers have struggled with shortages of key battery materials since mid-2021, including essential elements such as lithium, cobalt, nickel and graphite.

Lithium prices continue to rally as demand for electric vehicles exceeds supply due to a material and refinery bottleneck.

While lithium is not ‘rare’, mining it requires expensive extraction methods that raise barriers to entry for investors. More critically, because of the industry's relatively small size, prices are easily affected by shortage and oversupply.

Electric vehicle sales are expected to double in 2022, supply chain disruptions and rising raw material costs could nonetheless deeply impact the industry.

Tesla CEO Elon Musk highlighted the challenge in a tweet, reflecting a nearly $61,000 per tonne increase over the last two years.

Lithium is only the latest critical shortage faced by the industry. Graphite, which makes up nearly one-fourth of an electric vehicle battery, is already in short supply. Tirupati CEO Shishir Poddar, predicts that demand for graphite will be triple current global production capacity, speaking to S&P Global Platts Analytics. Tirupati is a Mumbai-based company that deals with graphene technology.

Prices have also been impacted by a month-long Indonesian export ban in January that drove up costs for energy-intensive industries in China, leading to a suspension of graphic production in the winter.

The global electric vehicle market size is predicted to reach $823.7 billion in value by 2030, driven by rising fuel prices, demand for fuel-efficient vehicles, and increasing climate regulation.

Securitizing supply

The world’s largest lithium deposits can be found in South America and Australia, with China ranking third for lithium production worldwide in 2020.

While China only owns 7.9 percent of lithium deposits worldwide, its nearly $60 billion investments allowed the country to develop a robust lithium supply chain. Moreover, China also owns nearly 82 percent of graphite reserves worldwide. This follows over $60 billion in investments into China’s lithium industry over a decade, relative to lagging European and North American investments.

American lawmakers have pushed for legislation to create a strategic rare earth reserve by 2025 and develop domestic sources. Eighty percent of the United States' rare-earth imports in 2019 were from China, according to the United States Geological Survey (USGS).

On March 31, US President Joe Biden announced invoked the Cold War-era Defense Production Act to ensure lithium would be supplied domestically; citing dependence on foreign sources of these resources as a national security concern.

This follows a series of initiatives to increase domestic oil and gas production, and open new rare earth mines quickly including a $750 million investment to expand existing extraction operations. In March 2022, the US Department of Energy also announced a bid to convert it’s ‘Rust Belt’ into a ‘Lithium Belt’, though it only invested $5 million. In its newly released federal budget, Canada announced plans to spend $3.2 billion, seeking to grow domestic production of lithium and other strategic minerals as part of a bid to join the global electric vehicle supply.

Mexican President Andres Manuel López Obrador also warned that if a Congressional reform on energy was not approved by next week, he would utilize a Supreme Court ruling to pass a new law on electric power that would increase government oversight and control, while eliminating mining concessions for lithium.

The announcement comes years after a Canadian company’s discovery of the world’s largest lithium mine in Mexico in 2018.

Australia, the world’s biggest exporter of lithium with over 46% of global lithium reserves, also reports being close to refining battery-grade lithium for the first time.

Australia has never refined lithium domestically, with the latest move welcomed by industry experts as the first steps to balancing China’s 80 per cent hold on refined lithium worldwide.

Chinese policymakers reacted to the sudden price of lithium by hosting market actors for two days in an effort to find solutions to the ongoing scarcity. At the event, China’s Ministry of Industry and Information Technology, called for “a rational return” to normal lithium prices.

Impacted markets

Demand for lithium is only expected to grow amid global fuel price instability, and the push for green energy.

According to Morgan Stanley, car prices can rise by up to 25 per cent, as car manufacturers bear additional costs. Electric car makers are already contending with hikes in raw material costs. While many have raised retail prices in response, the industry risks slower adoption and market entry with higher consumer pricing.

Cameron Perks, an analyst at Benchmark Mineral intelligence speaking to Bloomberg, predicts supply may not be balanced against demand until 2026. He predicts supply may not meet demand until 2026.Global demand for lithium batteries is expected to increase tenfold by 2030, according to Bloomberg NEF.

Current supply challenges are rooted in decisions to slow down expansion and new projects following a slump in lithium prices during mid-2020.

Facing pandemic-related supply disruptions and inflationary pressure on raw materials, growth is falling short of demand.

To adequately meet demand by 2025, BNEF estimates that nearly $14 billion in lithium extraction and refining investments are required globally, with an additional $5 billion by 2030.

 With pricing pressure mounting on manufacturers and consumers alike, it remains to be seen whether this will drive EV innovation or slow adoption of green technology in developed and emerging markets worldwide.

Source: TRT World