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Australia is betting on the demand for lithium growing in coming years. But what if the industry busts?
By Jamie Smyth
When five geologists fell on hard times during the 2014 commodities crash, they packed their bags and traveled to the Australian Outback in search of fresh mineral riches to mine.
The friends, who met at university in Perth, began exploring for tantalum, a corrosive-resistant metal used in electronic equipment such as mobile phones. But within weeks of drilling holes on a prospect in the remote Pilbara region — think Mad Max — they unearthed a massive lithium deposit, the latest in a wave of discoveries that has transformed Australia into the world’s biggest supplier of the key ingredient in rechargeable lithium-ion batteries.
“Australia is now the lithium capital of the world and Pilgangoora is one of the biggest lithium mines on the planet,” says Neil Biddle, one of the five geologists and co-founder of Pilbara Minerals, which opened its mine and processing plant this month. “We [Australia] are already global leaders in gold and iron ore and we can do the same with lithium.”
Pilgangoora is one of six lithium mines opened in Western Australia over the past 24 months in response to a global boom in demand for battery raw materials driven by bullish forecasts for sales of electric vehicles and energy storage systems.
Between 2016 and 2020, Australian-based miners will almost triple annual production of lithium to 188,000 metric tons, accounting for about half the world’s total supply.
By 2020, UBS forecasts, Australia will have streaked ahead of competitors in Latin America and will be producing half the world’s lithium, positioning a country better known for exporting highly polluting coal and iron ore at the forefront of a green energy revolution.
The lithium boom is attracting billions of dollars of investment in new mines, as well as 3 billion Australian dollar commitments to build five lithium hydroxide refineries. These investors range from heavyweights such as Albermarle Corp. of the U.S., Chile’s Sociedad Química y Minera (SQM) and China’s Tianqi Lithium as well as a plethora of junior miners and new entrants in Western Australia. It is part of a wider push by global miners to discover, dig up and process battery raw materials, including nickel, cobalt and graphite.
Australia is seeking to cash in on the frantic activity by encouraging companies to move beyond mining and processing ore and invest in the more complex business of making precursors — the mix of metals and chemicals that go into battery cathode production. This is the most lucrative end of the supply chain that will power a global lithium-ion battery market forecast to grow from $60 billion in 2017 to $100 billion by 2025, says the World Economic Forum.
The state government in Perth is even investigating whether Western Australia could become a hub for building niche batteries, the type of value-added activity it was unable to attract during the recent iron ore boom.
“The reason we were never able to succeed in iron and steel is there are other people already in the space,” says Bill Johnston, Western Australia’s minister for mines. “But this is about new demand, not existing demand … a multibillion-dollar opportunity.”
Not everyone is convinced. Skeptics warn that the supply boom could turn to bust if electric vehicle sales disappoint or bullish forecasts that lithium demand will triple within a decade prove overly optimistic. Advances in battery technologies could yet produce alternatives to the metal, which may dent demand. Others warn lithium pricing is volatile and lacks the transparency of other battery materials, such as nickel, which are traded on the London Metal Exchange.
Prices for lithium carbonate — the most widely used form of the metal — have fallen by a third in Asia since the start of the year and are trading at two-year lows, according to data compiled by research group Benchmark Mineral Intelligence. Morgan Stanley estimated in February that prices will fall 45 percent by 2021 due to a coming wave of low-cost lithium brine projects in Chile — a development that it predicts will challenge the new generation of Australian and Chinese producers.
“We expect these supply additions to swamp forecast demand growth. As a result, we forecast 2018 to be the last year of global lithium deficit, followed by significant surpluses emerging from 2019,” Morgan Stanley told clients.
Such concerns were noticeably absent at Pilbara Mineral’s opening of its Pilgangoora mine this month, when guests dined on fresh prawns, oysters and roast beef in the 40-degree Celsius heat, about 930 miles from Perth. Several of the investors attending the event became multimillionaires by taking a punt on the Perth-based company, which has transformed from a penny stock worth millions five years ago into an AU$1.4 billion industry leader.
“The big surprise [is] the dominance of Western Australian supply of lithium raw materials,” says Ken Brinsden, CEO of Pilbara Minerals, who has dubbed the area “Lithium Valley.” He rejects Morgan Stanley’s bearish predictions and forecasts that the region will dominate the supply of the metal for years to come due to bountiful supply and a mining culture able to deliver projects on time and on budget.
Overlooking Pilgangoora, Brinsden points to two neighboring lithium mines owned by Altura Mining and Mineral Resources, which have recently opened. Together they will produce annually 2 million metric tons of spodumene concentrate, a pale-gray material that contains about 6 percent lithium.
This powdery substance is currently shipped to China, where refineries convert it into lithium hydroxide and lithium carbonate products used in batteries. At full production, the three mines would provide enough lithium for batteries to power roughly 8 million electric vehicles per year.
Between 2016 and 2020, Australian-based miners will almost triple annual production of lithium to 188,000 metric tons, far outstripping rivals in Chile, Argentina and China and accounting for about half the world’s total supply. Australia’s market dominance is being driven by delays to Latin American projects, the rapid delivery of schemes Down Under and a growing preference among customers for lithium hydroxide, rather than carbonate, products due to changes in battery chemistry.
Until recently lithium carbonate — used in everything from pharmaceuticals to cement and batteries — dominated the global trade in the metal. But battery manufacturers are increasingly using lithium hydroxide, a material with a higher percentage of the metal than its carbonate equivalent.
Hard-rock mining can make lithium hydroxide products more competitive, leading analysts to predict a more rapid growth in the use of hydroxides than carbonates in coming years.
“The evidence for the shift to hard-rock mining is in all the new mines like ours which are attracting finance and big players such as Albermarle targeting expansion of hard-rock investments,” says Brinsden.
Albermarle, the world’s biggest lithium producer, this month put on hold a planned expansion of its brine operations at Chile’s Salar de Atacama lithium project while simultaneously accelerating a plan to build a $400 million lithium hydroxide processing plant in Kemerton, Western Australia. It cited growth in demand for lithium hydroxide from battery-makers in its decision.
The U.S. producer also agreed to pay $1.15 billion for a 50 percent stake in the Wodgina mine owned by Mineral Resources, which neighbors the Pilgangoora mine. And in a boost to the state government’s plan to attract value-added activities, Albermarle will build a processing plant to convert spodumene ore to lithium hydroxide.
“This is a big test for Australia, which hasn’t added a lot of value to its mining exports in the past,” says Scott Winter, a former coal mining expert who recently joined Mineral Resources as chief operating officer. “We want to make lithium hydroxide rather than transport large volumes of lower-grade material to China for processing.
“A metric ton of spodumene concentrate sells for $961 while a metric ton of lithium hydroxide sells for as much as $18,000 — so it’s a real value-add for us [and] the economy in general,” he adds.
Mineral Resources is not alone in moving into lithium hydroxide processing. China’s Tianqi Lithium is investing hundreds of millions of dollars in a new processing plant near Perth and an expansion of the Greenbushes mine, which it jointly owns with Abermarle. Chile’s SQM and Australia’s Kidman Resources plan to build a third plant to process ore from its Mount Holland mine, which has signed deals with Elon Musk’s Tesla and the Japanese giant Mitsui.
The longer-term outlook is good, with lithium demand set to triple by 2025 as sales of electric vehicles grow.
BHP, the world’s biggest miner by market capitalization, is also seeking to ride the battery boom by investing in its Nickel West Australia division — a subsidiary that faced closure until the growth in the electric vehicle market. It is also investing tens of millions of dollars in a nickel sulfate plant, with a goal to sell 90 percent of the metal into the fast-growing battery market by 2020, rather than the lower-margin steel industry. “We want to go from digging rocks in the ground to making precursor on a scale that doesn’t exist anywhere on the planet,” says Eduard Haegel, president of BHP Nickel West.
Haegel says Western Australia is blessed with minerals but also benefits from its geographical location near Japan, South Korea and China, the world’s pre-eminent battery-makers.
Yet some commentators warn that the sharp falls in lithium prices this year highlight the volatility of the battery market, where technologies, fiscal incentives and supply chains are changing rapidly. Spot prices of lithium carbonate in China — the world’s biggest consumer of the metal — have more than halved this year following cuts to subsidies for electric vehicles and growth in Australian supply.
Some see an echo of what happened in the iron ore market a few years ago, at least in the short to medium term.
“There was a big spike in iron ore prices when demand outstripped supply a few years back, which drew new entrants into the sector,” says Andrew Driscoll, head of resources research at CLSA Asia-Pacific Markets. “But when prices returned to normal levels after a supply response, some companies with lower-quality assets were squeezed out.”
But, he says, the longer-term outlook is good, with lithium demand set to triple by 2025 as sales of electric vehicles grow.
Australia is already a world leader in extracting battery minerals and will soon become a major processor of lithium hydroxide. Moving further up the value chain to manufacture battery precursors, cathode material and niche batteries is a much tougher challenge, however. The current world leaders China, South Korea and Japan have first-mover advantage, expertise and lower cost bases than Australia.
“From lithium in the ground to becoming a battery there is a need for ore, spodumene, hydroxide, precursor chemical, anode and cathode battery. At the moment we have a dominant position in the first two and we are close to having a very large place in the hydroxide market,” says Johnston. “[We now need] to make sure that we have every step along the pathway and then, perhaps in the future, there will be specific reasons to have batteries manufactured in Australia.”
The geopolitical fight to power a cleaner world
Australia is not alone in targeting the high-tech battery market, with China, the U.S. and Europe all seeking to become leaders in a sector critical to the transition to clean energy and the automobile market.
The U.S. can claim the world’s biggest battery plant, Tesla’s enormous gigafactory in Nevada, while the EU has formed a battery alliance and recently outlined plans to part fund the construction of factories to manufacture them. But Asia controls 80 percent of planned battery production capacity, according to Bloomberg, with China by far the market leader at 69 percent.
U.S. and European officials fear that control of the battery market, as well as the associated lithium hydroxide and precursor sectors, could give rivals such as China an edge when it comes to making the next generation of electronic vehicles. Battery plants are likely to be located near the main production centers for electric vehicles, which means they will play a role in deciding the location of the automobile industry.
Strategic factors are also boosting the battery minerals industry in Western Australia, says Paul Everingham, CEO of the state’s Chamber of Minerals and Energy.
He says U.S. concerns about the dominance of China in rare earths, lithium processing and battery precursors was one of the reasons the U.S. and Australia signed a memorandum of understanding this year to work together on “strategic minerals exploration, extraction, processing and research.”
“It is all part of a wider geopolitical battle,” says Everingham, adding that the battery boom is also boosting mining activity in nickel, cobalt and other minerals. “Within five years these industries will be as big as the gold sector, in terms of their contribution to the state.”
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