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Understanding Lithium-ion Price Volatility

Understanding Lithium-ion Price Volatility

Few products have experienced the kind of pricing rollercoaster ride that lithium-ion batteries have in recent years. From staggering highs to abrupt plunges, the lithium-ion market has been nothing short of volatile— leaving investors, manufacturers, and analysts struggling to comprehend these dramatic swings and adequately plan for the future.

Understanding the factors driving these dramatic price swings requires a nuanced approach. While it’s tempting to attribute the volatility solely to supply and demand dynamics, the reality is far more complex.

Why We Need to Be Paying Attention

Understanding volatility in the lithium-ion supply chain comes at a critical time. Electric vehicles are now making significant progress in replacing internal combustion engine vehicles, renewables are accounting for 90% of all new electricity generating capacity annually, and batteries are establishing themselves as the common denominator of it all.

A volatile supply chain leads to uncertainty. Pricing uncertainty, investment uncertainty…you name it. It is difficult to be a global automaker and chart out a course to fleet electrification when you don’t know what could happen to the key component’s price at any given time. We should all care about this because the absence of a stable supply ecosystem hampers the growth of electric vehicles and renewable energy, limiting our ability to set and achieve clean energy goals.

The Electric Vehicle Revolution

Some context may be useful. In 2022, following the Russian invasion of Ukraine, the global fossil fuel market was quickly upended. Gas prices exceeded five dollars per gallon; the future, it now seemed, was going to be electric vehicles. Consequently, every automaker under the sun rushed to lock down resources to get a foothold in the rapidly emerging market.

With the flip of a switch, the demand for lithium-ion batteries soared, including the materials that go in the batteries – particularly lithium, nickel, graphite, and cobalt. This turn of events made clear that the supply chain was not as agile as one might hope, and consequently the price of battery chemicals like lithium carbonate skyrocketed to US$72,000 per metric ton, nine times higher than the price in 2020. Similar increases occurred for nickel and cobalt.

The chaos can be attributed to the difficulty of securing the raw materials at the top of the supply chain. A conventional lithium mine can take 10 or more years after breaking ground before it is producing any lithium. Seventy-five percent of the world’s cobalt comes from one country in Africa, where it is largely mined by hand, and those mines are owned by countries already wielding great influence in the industry. Nickel mining and refining are only offered at competitive prices in Asia, or places where there are loose environmental regulations.

But in 2022 those challenges didn’t slow anyone down. The market responded to the newfound EV demand and poured reckless amounts of money into expanding production of battery materials. Without proper market signals in place, this resulted in an oversupply of materials. As the EV market cooled, the result was a significant decline of prices. We are now in the middle of the bust that followed the 2022 boom, and producers are feeling the struggle amid low prices. With known risks investors are also skeptical to do it all again when demand for lithium-ion batteries picks back up to any significant degree.

Consequences of Volatility

Although the global lithium-ion battery supply chain is slowly maturing, the market is still at the stage where just a handful of countries have outsized control of supply, supply contracts, and price. Moreover, whether strategically or because it’s still economically viable for them, those players don’t seem to mind continuing production even in a poor price environment.

Excess mining and refining capacity allows players to clog the supply chain by flooding markets and keeping prices low, driving out competitors who will not be able to sustain the low prices until demand recovers. Low prices may be ideal for automakers now, but if the bulk of their supplier network doesn’t survive the bust it could spell trouble when demand recovers. This is all happening as global economies are trying to develop and localize their own battery supply chains.

Another consequence is the price. With no reliable frame of reference, there is uncertainty around raw material pricing which can turn off investors. In other words, lithium-ion material pricing hasn’t yet evolved to match the actual demand. Pricing controls, in addition to market speculation, have wildly distorted what a tonne of battery-grade material should cost. To combat this, third-party firms are trying to make sense of the supply chain to better represent price, and lithium producers are even holding auctions for the sole purpose of price discovery.

Where is the Market Going?

It is possible that supply and demand dynamics will eventually level out and get lithium-ion battery material prices to a somewhat consistent place. There are also production facilities that are receiving government support despite the market slowdown, so that when demand recovers less additional investment is required to turn a profit. Stakeholders all across the supply chain may also respond to the chaos with more reasonable contracts for their customers because it’s better for business. But it is also possible that suppliers will capitalize on the nature of the supply chain to have protection during the bust cycle and hefty margins during the boom cycle.

With geopolitical risks, volatility, and predatory practices all in play, it is likely the current oversupply and low price environment of battery materials won’t last forever. In light of this the International Energy Agency (IEA) has urged stakeholders to consider alternative battery chemistries, right-size batteries, and launch recycling initiatives, which cumulatively can reduce demand for chemicals such as lithium 25% by 2030.

Alternative Battery Chemistries

Lithium, nickel, and cobalt are not the only resources that can be used for rechargeable batteries, and exploring alternative chemistries is one path forward. Enabling a supply ecosystem in which materials can be readily secured from diverse sources presents a way for automakers to achieve supply independence from the volatile lithium-ion market. By leveraging abundant resources that can be readily-sourced domestically or from free-trade partners, manufacturers can reduce dependence on costly imported lithium compounds.

Embracing locally sourced materials not only provides a hedge against price fluctuations but also promotes regional economic development and energy independence. In this way, investing in alternative battery chemistries emerges as a prudent strategy for achieving long-term growth while advancing clean energy goals.

Focusing on domestic battery manufacturing infrastructure creates jobs and stimulates economic growth, laying the foundation for an economically stable future without the volatility of the lithium-ion market threatening the battery and clean energy industries.