EVs Are Booming. Are We Running out of Lithium?

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You have to do the calculations. Assuming we're using the same type of battery technology, a Tesla-type battery pack, And 60% of the cars manufactured worldwide are electric. How much lithium and cobalt do you need? Well, about 10 times as much as is currently being mined.

Hello and welcome to the Barron Streetwise Podcast. I'm Jackson Cantrell in for Jack Howe, who will be back next week. The voice you just heard is Bradford Cornell. He's an economist and professor at UCLA, a senior advisor at BRG, and the co-author of Global Climate Change: The Pragmatist's Guide to Moving the Needle. Brad says the world won't be able to meet current electric vehicle targets without a drastic increase in the mining of key raw materials like lithium, cobalt, nickel, and copper. Is it time to gear up for the mother of all metal squeezes? We'll hear from Brad and a metals fund manager, and also Barron's senior writer and resident battery expert, Al Root. Don't forget your periodic tables, there might be a quiz and/or song later. Listening in is the former producer of this podcast, Meta. Hi Meta!

Hi!

We're talking about batteries today, so I thought it would be a good idea to start the podcast with a science experiment. And the listeners can't see it at home, but I got a lemon in front of me, there's a a zinc nail on one side, a penny on the other side, and a wire in between them. And when I touch the wire to the nail— and normally you'd want a voltmeter to do this, but I'm just going to use my tongue to feel the electricity— when you touch the pen, you can feel the electrons moving from one—

Jackson, I think we need to cut this experiment short.

Well, we're talking real power here. I mean, fun fact, there was a new world record for the most electricity ever produced from lemons. It was this past November at the climate summit in Glasgow. 2,923 lemons generated 1.94 watts of electricity. 3 times that and you could charge your phone. I think I have something here. Yeah, you should take that to the Shark Tank. Thankfully for the future of electric vehicles, today's lithium-ion batteries are thousands of times more efficient than the lemon battery. And it's no wonder. Batteries are complicated to produce. First you need ultra-refined metals, typically lithium, copper, cobalt, nickel, graphite, and manganese. Then those metals need to be meticulously laid out in layers of thin sheets that are then rolled into a cylinder, like some sort of battery cannoli. Or more accurately, a croissant. Maybe finger baklava is the best analogy. Oh yeah, and if any of those layers touch in the wrong way, it can lead to a runaway thermal reaction that causes the battery to catch on fire. Anyhow, the baklava battery is stored in metal cans that look a lot like the AAA batteries in your TV remote. In a Tesla Model 3, 4,416 of these battery cells form a flat battery pack skateboard which supports the rest of the car. The falling cost of that battery skateboard is the main reason electric vehicles are now feasible alternatives to gas cars. According to Bloomberg New Energy Finance, battery costs fell roughly 90% between 2010 and 2020. You heard that right, 90%. And that drop mainly comes down to new tech that makes batteries cheaper and more efficient to produce. Meanwhile, economies of scale have made battery packs easier to put together. If battery costs had remained at around 2010 prices, the Tesla Model 3's battery pack would cost around $100,000 to make. Now those are under $10,000. But can we expect costs to continue to fall from here?

But I kind of fear those costs are pretty much asymptoted.

That's Professor Brad Cornell at UCLA. He just used the word asymptoted, which is professor speak for flatlined. In other words, Brad says the days of falling battery costs could be behind us.

You'll notice that we've seen in the last couple of months, all the electric car companies are raising the prices of the cars they aren't even delivering yet. The Ford Lightning has gone up, the Rivian R1T, the Ford Mach-E, Tesla, everybody's raising prices. Then the basic reason is the battery packs.

For the first time in a decade, battery prices are projected to rise in 2022, and that's in a year where EV production is up more than 50% from last year. It turns out economies of scale are running into the realities of supply shortages. Especially when it comes to raw materials. Remember the refined metals that are rolled up into our battery baklava? Well, they add up. According to Brad, each Tesla Model 3 battery contains roughly 12 kilograms of lithium, 15 of cobalt, 28 of nickel, and 43 kilograms of copper. If we assume countries meet their electric vehicle targets by 2030, the world is gonna need more than 10 times the lithium and cobalt than is produced today. And that's just for car batteries. It does not look like miners are on course to meet that demand. Without a huge increase in future mines, Brad says that EV battery manufacturing will be severely constrained. And that's on top of geopolitical and humanitarian concerns.

And already the cobalt's coming from the Congo under questionable humanitarian circumstances. Lithium comes from Australia and Chile and China. And in fact, most of the processing of these elements, about 80% of that is done in China. So we have to be very careful.

We've already seen tremendous price increases in lithium. According to S&P Global, prices for the metal rose over 480% in 2021. That's created major headaches for carmakers like Tesla. Here's CEO Elon Musk at the company's second quarter earnings call in July.

Processing of lithium, uh, is insane. I'd like to once again urge entrepreneurs to enter the lithium refining business. You can't lose. It's a license to print money.

It's not just the lithium supply that appears constrained. In April of this year, Goldman Sachs Commodities Research released a report titled Copper is the New Oil. It said the world's copper stocks could be depleted by 2025 and that the metal was set to nearly double to $15,000 a ton. Then in July, S&P Global released a report on the future of copper that concluded, unless new supply for the metal of electrification comes online in a timely way, net-zero emissions by 2050 will likely remain out of reach. Following both reports were several news stories about a coming massive shortage in copper that would imperil any clean energy transition.

A massive deficit in copper coming in the next 3 years.

You're going to see a need for copper demand literally will double between now and 2035. And, you know, we've heard a lot of governments, the US government and others expressing great alarm We'll get back to copper soon. But what I'm getting at is high raw material costs are working their way into vehicle prices. Back in May, we heard from Wells Fargo analyst Colin Langan on this podcast. He said the raw materials to make a battery had increased from $62 to $119 a kilowatt. That increase would add around $2,000 to $3,000 to the cost of producing a typical EV. EV makers have hiked prices by more than that.

Tesla's raised prices like 35% this year. Ford has raised the price of the F-150 Lightning like $8,500 for some trims. Rivian raised their price $12,000.

That's Barron's senior writer Al Root. He covers the auto and battery industry, and he also has a degree in materials science and engineering once worked for a steel company, and has been to mines all over the world. He doesn't seem too sad that Jack's on vacation this week.

I'm glad Jack's off for two reasons. Now, Jack knows how I feel about him, but my wife thinks he's way more entertaining on the Barron's Roundtable show than I am, so that makes me bitter. And, uh, so now I'm off, I can, I can have all the quips potentially for one week.

Okay, back to batteries. Al says EV companies are well aware of the breakneck growth in demand for raw materials, and many are working to secure future supply years in advance.

They're not really buying or doing like the Tesla mine. What they're doing is like the, the classic is offtake agreements. If you build your mine, I guarantee you I will buy X million tons at X dollars a ton. And I may even give you some cash up front. And then you can take that as a mining company and say to the bankers, look, I got half of my production sold at this level. Please finance my project.

It's not only the raw materials. EV makers are looking to secure the entire battery supply chain. General Motors and battery maker LG Chem are building 3 multibillion-dollar battery factories in the US. In July, Panasonic and Tesla announced plans to build a $4 billion battery plant in Kansas.

And so on the battery side, the automakers have basically said, okay, listen, we'll put up half the money, you put up half the money, we'll have this battery joint venture that we'll buy all the batteries from. And then also the automakers aren't reinventing the wheel. They're like, I can't build lithium-ion batteries to the effectiveness of a cattle or Panasonic, you guys come over here, you're our partners, we'll take your technology, you take my money, we build the plant.

So if electric vehicle makers are looking years in the future to lock down battery supplies, does this mean investors should follow suit? And where might copper and lithium prices go from here? That's next after this short break.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, We analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. You just heard about an impending shortage of copper, cobalt, nickel, and lithium. Are the world's clean energy goals doomed? Here's Al.

You know, I've talked to, you know, I cover this industry, so you call up these people every quarter and they talk to you after earnings and we've asked flat out, right? Like, so are we going to like, Lithium's up 400%. Are we going to be short lithium? Like, are you going to actually like put people on allocation because you can't, you don't have enough? And Albemarle, which is the world's largest producer of lithium, says, no, no, we're not going to have a shortage. Things are tight. It's, it's more a reflection of two things. One is, you know, there's definite market tightness right now. And then it's sort of a price signal to the industry on how fast you need to get these plants and new projects up and running. So in conclusion, you know, the price is the ultimate signal for of these things. We tend not to run out of anything.

So if price is the ultimate signal for commodities, what are metal prices telling us now? At the beginning of the year, prices for lithium, cobalt, nickel, and copper were all up sharply versus the year before. Since then, lithium prices have remained stratospheric at around $50,000 a ton. Lithium was trading below $5,000 in January of 2021. But the 3 other metals have since leveled off or seen price declines this year. Since April, cobalt has fallen roughly 40%. Copper has gone from around $4.70 a pound in April to a little over $3.50 today. And nickel is flat on the year, despite a meme stock style short squeeze in March when its price doubled in a matter of hours. In short, the market does not seem to be predicting a doomsday-style supply crunch. That's despite figures from the US Geological Survey that show the world's reserves for some metals are being depleted. On that point, Al says that a drawdown in reserves does not mean the world is literally running out of metals.

So, you know what the funny thing is that people will sometimes cite? You know, they'll say like the world's reserve of oil. It's only like 10 years. The world has 10 years of oil left. It's a fundamental misunderstanding of the way mining companies or energy companies report reserves. There's two things. One is they report them based on price. So those are reserves, you know, that are basically economic. The minute we have $200 oil, there's suddenly a lot more oil.

One key for understanding the long-term price trajectory of any commodity is understanding the marginal producer. If the price of a commodity rises high enough, more locations or methods to produce it will suddenly become viable. We saw that with oil during the last commodities boom of the 2000s. When the price of oil rose above $50 a barrel, it made sense to invest in more expensive oil-producing projects. For example, squeezing oil out of tar sands in Alberta. Then as new supplies came online, prices leveled out. Al thinks we could see something similar with metals. Prices may remain elevated, but it's unlikely they'd be stratospheric for long.

Are we facing an existential crisis with copper? No, that's ridiculous. Could copper prices average $6 instead of $3 for, you know, the next decade?

Yes.

Sure. Maybe. You just have to do the supply-demand. You have to know where supplies are coming online.

So new marginal producers could eventually keep metals prices in check. But what about the demand side of the equation? Are high prices leading to changes there? I reached out to Terence Quaker, the founder and CEO of Valiant Asset Management, a fund that specializes in commodities and metals.

On the technological side, there's just constant research into replacement and reduction. Of high-priced metals. And so it's a fine balance, right? So you can have this demand from green tech and you look at it now and say, okay, this is the technology we have in place, but now that we have to scale this, should never underestimate people's ambition in substituting out the expensive components.

Yeah, let's talk about that a little bit more. Like, for example, if I see in the future, you know, governments have EV targets, say, totaling like 60 million EVs a year. And to do this, we're going to need, you know, 6, 7 times the amount of cobalt we're mining right now. So if, you know, my thought is just to like, oh, why don't I just buy up a bunch of cobalt now, hold on to it for, for a decade and then get rich.

So, and that, and that's, that's something that's advanced in terms of substitution, right? Because there, there has been a lot of already a lot of focus on cobalt. And for the, the nickel-cobalt-manganese batteries, and, and first it used to be a ratio of close to 1:1:1 for those metals in that type of battery. Then you had 3:2:1 come out, then you had 5:3:1 come out, and this is the ratio of nickel to cobalt to manganese. And now you have 8:1:1 batteries, which is nickel to cobalt to manganese.

According to Terence, you can buy a huge pile of cobalt if you want, But it comes with the risk that battery makers will continue to find creative ways to use less cobalt to compensate for high costs. In fact, they already have, and if those changes mean future cobalt demand is smaller than anticipated, you'll end up sitting on an expensive pile of rocks that is now worth less than you paid for. And it's not just cutting back on cobalt. EV makers have also found ways to avoid using the metal entirely. One recent development is the use of lithium-ion phosphate batteries.

China's had a massive ramp-up of EV sales in the last 2 years, and a lot of them now just use lithium-ion phosphate batteries, which has no cobalt whatsoever. And what we believe at Vaylin is that you'll see— start to get a tiering system. Certainly the highest capacity and the most stable batteries still need cobalt, but If you're targeting a population that has mostly city driving and you don't need very high discharge rates, you can easily use lithium iron phosphate batteries.

Terence points out that substitution is not a cure-all for high metal prices. You might have heard about an increase in thefts of catalytic converters. Those filter out harmful compounds in car exhaust. And have become extremely valuable as prices for metals like palladium and rhodium have more than quadrupled. The insurance company State Farm is on track this year to pay out more than $60 million to replace stolen catalytic converters. Terence says automakers initially used palladium in the car part as a cheaper alternative to platinum, but soon palladium became more than twice as expensive as platinum.

Almost everybody adopted that high palladium-containing catalytic converter. Decade goes by, you see palladium kind of creeping up, but nothing really changed because when you get to these applications, changing the technology is a big cost in itself too. So it has to both exceed the price people are willing to pay for the end product, but also the CapEx involved in developing that new technology and getting it to market.

In the past couple of years, I've seen a lot of headlines about a type of battery called a solid-state battery, along with claims that the new technology would more than triple battery efficiency and charging speeds. I asked Terence about solid-state batteries in electric vehicles. He says it will likely be a long time before they're commercially viable.

All these stories claiming that someone invented this solid-state battery technology. And they achieved X efficiency, which is 5 times more efficient than what they have now. But when you're leveraging atomic properties, it's really easy to do that in like a really small battery. But then when any sort of defect or error in the structure of that solid-state electrolyte can cause a drop in efficiency, it's really hard to get that perfect in like a car battery. You could definitely do it at that scale, but scaling up is exponentially more difficult.

Terence thinks battery metals will remain tight for the next several years, but he says the most pronounced shortages and price increases might not be in the metals that make up the batteries. According to him, the EV motors are where to look. More specifically, the heavy and light rare earth metals that make up powerful magnets that help convert electricity into motion.

So light rare earths being neodymium, gadolinium, and then two examples of heavies would be dysprosium and terbium. And once you dope that magnet with dysprosium or terbium, it'll retain its magnetic force at temperature. It's those rare earths that we think are the more important components of the drive chain in terms of their impact on metals markets.

Neodymium, gadolinium, dysprosium, terbium. I feel like I've heard this before.

There's a dream of cherubim, actinium, rubidium, and boron, gadolinium, niobium, iridium, and strontium, and silicon, and silver, and samarium, and bismuth, bromine, lithium, beryllium, and barium.

Since Tom Lehrer wrote the lyrics to that song, by the way, 17 additional elements were discovered. Anyhow, back to rare earths. Terence says they're not actually all that rare, but they are expensive to mine.

The funny thing is they shouldn't be called rare earths. They should just be called non-economic earths.

One factor that makes rare earths non-economic earths is that they're typically found in extremely low concentrations together with a whole bunch of other rare earths. Miners need to plan their projects around a basket price of all of the metals. This makes ramping up production to mine just one of them economically tricky, because if everyone starts digging up rare earth metals in response to, say, high dysprosium prices,— that has the effect of flooding the market with all the other rare earths that are mined along with it. And when prices of those other metals fall, it makes mining the dysprosium even more expensive because you're making less money from the other metals.

If dysprosium is only half a percent of your output of total rare earths, and that's actually pretty average, it can go up to like 3%, 4%, then you really have to worry about the whole other 99.5% of what you're getting out. Right. So the more that those prices go down because they're oversupplied, your basket price could only creep up really slowly.

I asked Terence if he thinks shortages in metals might lead to price increases that put countries' climate goals in jeopardy. He says yes. If the supply of certain rare earth metals becomes too constrained, the EVs and wind turbines that rely on rare earth magnets will be forced to use less efficient alternatives that Terence said would consume around 30% more energy. I asked Terence what options individuals have for investing in rare earth metals. He says not many.

You actually have to trade in the physical rare earths, take them into a warehouse, make sure they're stored properly. Depending on where they sit on the periodic table, they could oxidize if not stored in an inert chamber of helium or argon.

So not exactly accessible for mom-and-pop investors.

That also changes whether you're holding the oxide form, the metal form, or the ferro form. Ferrodistrosium is the one that they use for magnets.

Is now a good time to play the song again?

You may be interested to know that there is an older, much earlier version of that song, which is due to Aristotle, and which goes like this. There's earth and air and fire and water.

Now, one last point from Brad Cornell at UCLA, who we heard from earlier. He says when it comes to solving climate change, governments should put more resources towards research and development to try to solve these supply problems, such as finding new ways to locate or process rare earth metals or recycle batteries. He is not a fan of subsidizing demand like the $7,500 EV credits in the Inflation Reduction Act passed last month. He says people who are well-off enough to buy new electric cars would likely have made their purchases anyway, subsidy or not.

We desperately need things like funding basic research and development, getting rights of way to improve the grid and all those things we need a government to do. We don't need a government to help rich people buy a $75,000 electric car. It's just a, a relative waste of scarce resources.

Thank you, Brad, Al, Terence, Meta, and thank all of you for listening. Jack Howe will be back from vacation with regular programming next week. You can subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow Jack on Twitter at Jack Hou, that's H-O-U-G-H. See you next week.

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