As headlines surrounding the electric vehicle market continue to grab the world’s attention, we sit down with James Calaway, the chairman of Global Geoscience, former chairman of Orocobre Ltd. and an experienced lithium industry participant, to discuss the growth in demand for lithium, what it will take to ramp up supply and how lithium is driving the electric vehicle revolution.
Brown Brothers Harriman: Describe the general supply chain of the two types of lithium resources – brine and hard rock – from production to the consumption level where it goes into a power tool or battery.
James Calaway: First, there is some distinction between the brines and the hard rocks. Those have slightly different paths. On the brine end, you begin with a big well field. You produce the wells, and the brine flows into these enormous evaporation ponds, sits there between eight months and 18 months depending on the original brine chemistry, is concentrated about 10 times and then cleaned. Once it reaches a prespecified level of concentration and purification, it moves to a specialty chemical plant, where it goes through a primary purification circuit. Then, if it’s going to be battery-grade material, it goes into a sophisticated purification circuit, is dried and is sometimes ground into fine micron balls. After that, it is shipped in 1-ton bags as a dry white powder to Asia as well as Europe and the United States. That material generally goes to the cathode makers, who use it to make the cathode part of the battery and then give that to the battery makers – some of whom are fully integrated and make their own cathodes – to put in their battery cells. The battery cells are then put in packs, and all the control systems are placed in – the cooling systems, packaging, separators, electrolytes and anodes. Finally, those packs go into the end product.
It’s a lengthy process from the beginning, where it’s just a raw material, to getting it into a car, phone or hand tool.
BBH: Is the only difference between the brine and hard rock resources how each naturally occurs and the steps that follow, or are there others?
JC: There are more differences. The hard rocks come out of a mine. They are blasted, ground and hit with acids to reach a concentration between 5% and 6%. That material is shipped to China and put into conversion plants, where it is cleaned up and converted to lithium hydroxide or lithium carbonate. Once that’s complete, then the material is indistinguishable from the material produced by brine.
BBH: What are the constraints to ramping up lithium supply around the world to meet increasing demand?
JC: One challenge with brines relates to their physical location. The only exploitable brines are in a small part of Chile and a small part of Northwest Argentina – high up in the Andes or down in the Atacama Desert, part of what we call the lithium triangle. These environments add great complexity from the start.
The biggest constraint in the hard rock area is not the concentrate production, but the conversion infrastructure in China to process the concentrate into end-user materials. This is sorely lagging concentrate production.
You are also operating in countries that have had a lot of political change. The stability of regulatory environments then becomes an issue because laws and regulations are often evolving.
Additional difficulties are posed by the fact that, ultimately, you’re trying to make high-precision materials with strict specifications for an ever-more sophisticated battery industry. You have to begin with the basic chemistry of the materials you start with and determine how to go through a complex process to produce a highly specific, very pure end material.
On top of that, these are capital-intensive projects. There have also been few built in the world, so the level of experience and expertise that exists, in terms of both engineering and line management, is thin.
Those factors combined create a complicated environment and have resulted in consistent disappointment in the delivery of the supply of lithium to the world. The supply forecast has consistently not been met in a material way. It is likely improving as the industry gains experience and better government policies emerge, but I would anticipate that industry analysts’ current supply expectations are highly optimistic on the possibility range.
BBH: How long does it take to get a new project online, from identifying the resource to commercial production at scale?
JC: For most projects, it takes around seven years before getting to a steady production cycle. This includes everything from inception to engineering and planning to environmental approvals to construction. After that comes the ramp-up process, the length of which is often underestimated.
Some would argue that in the hard rock part of this equation, which is about half of production, the timeframe from inception to the point that you have lithium concentrate, which is about a 5% to 6% material that comes out of these hard rock deposits, can be three to five years. However, that’s just part of the process. Hard rock suppliers call the material they make lithium concentrates measured as LCE, or lithium carbonate equivalent, but it’s not lithium that can be used – it’s just a precursor material. These concentrates are sent to China, where they are concentrated further and purified.
Currently, the only commercial conversion taking place is in China, and that’s one of the opaque parts of the supply-demand equation because people are having difficulty knowing what the country’s conversion capacity and utilization rates are. That is important because if it is lagging, there may be a glut of spodumene concentrate (a pyroxene mineral consisting of lithium aluminum inosilicate that is a source of lithium), but it does not automatically translate into lithium carbonate or hydroxide that can be used in batteries.
BBH: At a general level, how does annual demand growth compare with how fast supply is growing? How much of that rising demand is for rechargeable batteries vs. other applications?
JC: Overall, year-over-year demand growth for lithium in products is around 18%, but if you look at the rechargeable battery side, that number jumps above 30%. Demand growth for other applications, such as hand tools, stationary battery applications, portable electronics and high-temperature glass, is just above GDP in the 5% to 6% range.
It’s a very dynamic demand situation that is difficult to predict, so the numbers vary enormously – anything from 600,000 tons to over a million tons of lithium carbonate being needed by 2025. The capacity for supply to respond to the upper boundaries of that is going to be a great task. It will require the allocation of well over $10 billion of capital, and given their long lead times, every high-quality project must start now if we have any chance of meeting that million-ton target, which I don’t currently see.
Some analysts have said that efforts in the Atacama Desert are going to grow dramatically; however, given the government policy there, the history and the fact that there are not many people with a deep understanding of the actual resource, I highly question that growth story. Others add in examples such as production in the Tibetan Plateau. The Chinese have been saying for years, though, that they are going to ramp up spodumene production, and there’s no indication that it has happened or will, because the availability of those resources is poor.
BBH: What has been the price response to the explosive growth in electric vehicle, or EV, demand for rechargeable batteries and lithium? Is there a forward market that is pricing out supply more than a few years?
JC: There is no forward market. It’s all been done on a bilateral contract basis, with the industry standard being one- or two-year contracts. Typically, it’s sold on a shorter spot price basis. Big end-users certainly want to find a way to lock down those prices. However, it’s not just a price issue – it’s a security of supply question. You see people getting nervous about a couple-hundred-billion-dollar shift in capital toward electric vehicles and asking if vital elements, particularly lithium, will even be available – and at a price that isn’t prohibitive.
The response so far has been a very rapidly increasing price for lithium carbonate. Looking at export data out of South America around FOB export prices in Chile, technical-grade material prices are at $12,000 or $13,000 a ton, and battery-grade material prices are at $15,000 a ton. There are spot deals in China being done at up to $25,000 a ton, though there is some indication of softening in China spot pricing. There is continued firming outside of China.
People doing project economics for lithium projects six or seven years ago were assuming $6,000 a ton for their battery-grade material, which provides a sense of the pressure.
BBH: How steep is the cost curve in lithium? Is there a significant difference between low- and high-cost producers?
JC: The first distinction to make is that high-quality brine reserves represent the lowest cost production. Projects involving the best hard rock deposits generally cost 70% to 100% more than the lowest-cost brine projects. When you take a granitic rock that has at most 2.3% lithium in it and go through the process of mining, blasting, concentrating and converting it, it’s just more expensive. So, the lowest production cost for lithium carbonate generated from hard rocks is about $6,000 a ton, whereas the lowest for the best-quality lithium from brines is between $2,500 and $3,500 a ton. It rises from there. Right now, there is certainly production well up into $7,000 or $8,000 a ton because it is lower grade and less efficient.
The key difference is that the good brines – those with a chemistry that has a low amount of contamination relative to the amount of lithium – are easier to deal with, so they are the most valuable. Everything from there begins to slide, and the quality of the brines gets worse. That does not mean you cannot produce them economically, but the cost to do so is higher – and at a certain point may become prohibitive.
On the hard rock side, the best hard rock in the world is in Greenbushes in the South West region of Western Australia. That has 2.3% lithium. For comparison, a scatter plot of the hard rock deposits around the world would be most scattered around 1.2% lithium. So, it’s an enormous difference in terms of the cost of production.
Overall, the good brines are the cheapest, and the good hard rocks are the next cheapest, but 70% to 100% more. Then, in each category you have to look at the details of the grades, how deep those hard rocks are, their configuration and the chemistry of the brines.
BBH: How much lithium goes into a Tesla battery?
JC: It depends on the kilowatt-hours. An average Tesla has a 70-kilowatt-hour battery pack, which is about 63 kilograms of lithium.
One of the key issues for the wide adoption of electric cars is that we need to remove the range anxiety issue. There are different opinions on the number of miles needed, but nothing is certain yet. What we can say, though, is that the battery packs are getting bigger, and as a result, the amount of lithium per electric car is rising. This means one should not expect a reduction in the average amount of lithium per vehicle. In fact, I expect the opposite.
BBH: That sounds contrary to what we might expect for cobalt, nickel and some of the other raw materials.
JC: Cobalt production is concentrated in the Congo, which is of great concern. As a result, a high amount of energy is going into altering the chemistry of the batteries and trying to dramatically reduce the amount of cobalt required, which would increase the amount of nickel. These efforts could create some constraints, and there’s no certainty they can get chemicals that are stable and have much less cobalt. You certainly can reduce it right now by doing what Tesla is doing, but it’s an interesting issue.
BBH: At a high level, how much lithium is going into an EV battery today vs. three or four years ago?
JC: Looking at the use for rechargeable batteries, five years ago it was around 27% of lithium, and now it’s 50%. Most people think that by 2025, it could be as much as 75% of lithium going into these batteries.
BBH: Is there anything else going on in terms of EVs that you find particularly interesting?
JC: I would add that the combination of public policy and the recognition of electric cars’ performance, quality, simplicity and importance for environmental improvement are driving all automakers to go at this race with great commitment. No matter how Elon Musk’s car company turns out, he is the one who caused the automobile industry to move faster and more furiously to take the needed steps to help this planet overcome the age of transportation by hydrocarbon. This is of monumental importance.
As many places urbanize and expand, particularly in developing parts of the world, the actual air pollution from the burning of hydrocarbons has made it so bad that it’s undeniable that something must change. So many cities in the world have air pollution problems, and it’s easier for politicians to say enough is enough. Completely clean vehicles are a great way to help this issue.
There are big economic incentives breaking out here, though, and it’s going to be interesting to see how these gigantic industries play this out. Obviously, the oil and gasoline industry players generally are unhappy about it – though the European energy companies are leading the way, whereas the U.S. industry is fighting it. There are other competing interests in the utility industry that are increasingly recognizing an opportunity for the electric industry to build out this capacity and sell a much bigger amount of electrons through renewable energy and gas-fired plants. Of course, the auto industry and its supply chain will have to fight this out. In addition, the auto dealers may have a negative view about all of this because electric cars are going to need different types of repairs. That could negatively affect the retail sector of the auto industry as well as the auto repair and parts industry.
There are some big disruptions going on with the electric vehicle revolution, and there will be big winners and big losers. We all need to start preparing ourselves for that change.
BBH: James, thank you for your time and insights.
This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area (“EEA”), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries.
© Brown Brothers Harriman & Co. 2018. All rights reserved. 2018.