Near-term headwinds versus long-term support: Where next for lithium?

If you remember your chemistry lessons from school, you’ll know that lithium is an outlier among metals: it’s the least dense solid element and is highly reactive.

Lithium’s volatility isn’t confined to the laboratory. The commodity has also experienced extreme price swings over the past few years as a result of momentous changes on both the demand and supply side.

In this blog, we’ll examine the factors behind this recent volatility, demand forecasts for the decades ahead, and finally the options for investors who want to gain exposure to long-term changes in the price of lithium.

What’s behind lithium’s volatility?

Between 2021 and 2022, the price of lithium soared by around eight times.[1] This was spurred by the remarkable rise of passenger electric vehicle (EV) sales, with year-on-year EV sales rising 55% in 2022 to more than 10 million.[2]

2023, however, saw an equally extreme decline in the price of the metal. This was partly driven by oversupply in the market from new mining operations, combined with a slowdown in EV demand growth, particularly in China following the removal of subsidies.[3] Another contributing factor to the steep decline was the sheer pace of the prior price increase – an exuberant market will always be vulnerable to a reversal of sentiment.

This year, the price has continued to fall, and some miners have started to reconfigure operations to constrain production. However, spot prices are falling at a far lower rate than in 2023, suggesting the period of extreme exuberance and sharp reversal may now be fading into the rearview mirror.

Long-term demand remains intact

Beyond short-term fluctuations in sentiment, we believe the long-term demand picture for lithium remains highly supportive given its central role in the energy transition.

According to BloombergNEF’s latest transition metals outlook[4], lithium demand for the energy transition is set to increase from 72% of total demand today to 92% in 2040. Total demand, meanwhile, is expected to increase by seven times by 2040.

The International Energy Agency similarly expects a large rise in clean-energy demand for lithium over the long term, projecting demand for clean tech applications rising more than 13 times between 2023 and 2040, according to announced ambitions and targets.[5]

The reason behind such high demand is that, while innovation continues, and new materials could begin to play important roles in the path to electrification solutions over the next decades, as of today lithium is set to remain centre stage in many battery chemistries given its unique physical properties. There is plenty of lithium available in underground reserves, but extraction is a complex process that takes years to develop. This means that supply may soon start struggling to meet this growing demand, creating upward pressure on prices.

More effective extraction technologies, such as direct lithium extraction (DLE), could quickly scale lithium extraction processes from brine and allow for quick expansion. However, as of today, not all companies have the right know-how, the necessary infrastructure hasn’t been yet set up, and the technology is costly. Today’s lithium low prices are not helping to make extraction processes more profitable.

How can investors access price changes in lithium?

Investors who want to gain exposure to the long-term trend of electrification and lithium’s role as critical input have two fundamental options: the equity route and the commodity route. We believe in either case it’s possible to employ a strategy that provides exposure to lithium while attempting to mitigate the volatility seen in the metal’s recent history.

An equity strategy could aim to provide exposure by targeting companies involved in battery-grade lithium extraction and hedging this exposure with other companies further down the battery value chain, such as battery technology owners. By spanning multiple geographies, sectors and market caps, this approach could aim to provide diversified* yet pure exposure to the underlying theme.

Alternatively, commodities strategies offer a different way of targeting exposure to lithium prices, with the potential advantage of introducing a new source of returns that is less correlated to equity markets.

For investors considering this option, it may be prudent to seek exposure to a broader basket of commodities relevant to the energy transition rather than focusing exclusively on lithium – particularly given its liquidity characteristics and recent history of price volatility. This might include other metals central to battery chemistry such as nickel and cobalt, or metals such as tin, zinc or platinum that play a supporting role in multiple clean energy applications.

For investors focused on expectations of long-term demand growth, we believe both equity and commodity-based strategies could have a place in a diversified portfolio.

 

*It should be noted that diversification is no guarantee against a loss in a declining market.

 
[1] Source: Lithium - Price - Chart - Historical Data - News (tradingeconomics.com)
[2] Source: Trends in electric light-duty vehicles – Global EV Outlook 2023 – Analysis - IEA
[3] Source: Commodities 2023: Lithium prices likely to see support from tight supply, bullish EV demand | S&P Global Commodity Insights (spglobal.com)
[4] Source: Mining Industry Needs $2.1 Trillion Dollars in New Investment by 2050 to Meet Net-Zero Demand for Raw Materials, Finds BloombergNEF in New Report  | BloombergNEF (bnef.com)
[5] Source: Lithium – Analysis - IEA