THE DISRUPTIVE WORLD OF LITHIUMcdn.vested.com.au/research/Lithium-Report.pdf · Source:...
Transcript of THE DISRUPTIVE WORLD OF LITHIUMcdn.vested.com.au/research/Lithium-Report.pdf · Source:...
CONTACT
Address
Vested EquitiesLevel 11, 50 Cavill AveSurfers ParadiseQLD 4217
Phone & Fax
Toll Free: 1300 980 849Phone: + 61 7 5655 5333 Fax: + 61 7 5655 5341
Online
Email: [email protected]
Website: www.vested.com.au
Vested EquitiesResearch
8 MAY 2017
THEMATIC INVESTING
THE DISRUPTIVE WORLD OF LITHIUM
www.vested.com.au
2 Vested Research
In our view, the long-term drivers of lithium look
very promising. In this report we look at investing
in lithium through the prism of electric vehicles.
In our view the increased penetration of electric
vehicles (EV) is inevitable given government
incentives/polices, global move to clean
technology and technological advances in electric
automobiles. With lithium batteries increasing the
economic viability of electric cars, we believe the
demand for lithium will significantly increase
with the increasing penetration of electric cars.
We must caution investors that this thematic is
unlikely to play out over the short term, but is
more of a medium term story. However, there is
no reason why the price of lithium and
investments exposed to this thematic couldn’t re-
rate ahead of this timeframe should investors
become more comfortable with the story (markets
are meant to be forward looking!). Clients can play
this thematic via Galaxy Resources (Speculative
Buy) and Global X Lithium ETF (Neutral).
EVs growth on the rise. In our view, whilst at least 50%
of current demand for lithium comes from traditional
uses, increasing global demand for electric vehicles,
especially driven by Chinese consumers will likely be
responsible for increased lithium demand. The electric
vehicle global market has grown 10x in the past five
years. This excludes Tesla’s Model 3 pre-orders of
~370,000 cars as of May 2016, which equate to ~30% of
total electric vehicles already on the road. Moreover, in
2015, China became the largest electric vehicle market in
the world where ~330,000 units were sold, or +343%
increase over the previous year. China now aims to put
another 4.5 million EVs on its roads by 2020 which
equates to demand for ~44,000 to 117,000 tons of lithium
www.vested.com.au
3 Vested Research
over the next five years, assuming a required ~150-400
grams of lithium per kilowatt hour, and average battery
capacity of 65 kWh (average battery capacity for
passenger vehicles is ~30 kWh, and ~100 kWh for
electric buses).
Governments’ long-term EV targets and incentives. 14
countries have committed to quantitative electric
vehicle stock objectives by establishing regulatory
incentives, with 13 million electric vehicles expected to
be on the road by 2020. For instance, China electric
vehicle sales are increasingly driven by government
subsidies and purchasing quotas on traditional vehicles
in Tier I cities. Subsidies for commercial and passenger
electric vehicles can be as high as 60% of the selling price
of a commercial vehicle, or ~40% in the case of
passenger vehicles. Wood Mackenzie expects electric
vehicles (including PHEVs) to reach ~13% of new light
vehicle sales globally by 2025.
How to play the thematic. We highlighted two
investments by which investors can gain exposure to
the lithium thematic – Galaxy Resources (Speculative
Buy) and Global X Lithium ETF (Neutral). Galaxy provides
investors exposure at the exploration & mining stage,
while Global X Lithium ETF provides exposure to the “full
lithium cycle”.
Primer on Electric Vehicles
and Lithium…
Key macro concerns regarding the lithium market include:
1. At what rate will lithium demand grow at given the
outlook for electric vehicle (and energy storage)
adoption?
www.vested.com.au
4 Vested Research
2. What lithium products are required by battery
manufacturers? As well as what are their relative
merits and how they are produced?
3. How and where lithium is mined and what are key
drivers for lithium supply?
The disruption of electric and
hybrid vehicles – Electric
vehicles versus Internal
Combustion Vehicles…
In our view, whilst at least 50% of current demand for
lithium comes from traditional uses, increasing
global demand for electric vehicles, especially driven
by Chinese consumers will likely be responsible for
increased lithium demand. An electric vehicle is a
vehicle that utilises electric motors (capable of
utilizing stored electrical energy) and technically
covers automobiles, rail, air, sea and space vehicles.
Indeed, the electric vehicle global market has grown
10x in the past five years. This excludes Tesla’s Model
3 pre-orders of ~370,000 cars as of May 2016, which
would equate to ~30% of total electric vehicles
already on the road. Moreover, in 2015, China became
the largest electric vehicle market in the world where
~330,000 units sold, or +343% increase over the
previous year. China now aims to put another 4.5
million EVs on its roads by 2020 which equates to
demand for ~44,000 to 117,000 tons of lithium over
the next five years, assuming a required ~150-400
grams of lithium per kilowatt hour, and average
battery capacity of 65 kWh (average battery capacity
for passenger vehicles is ~30 kWh, and ~100 kWh for
www.vested.com.au
5 Vested Research
electric buses). Indeed, attributes of lithium ion based
batteries make it superior to competing technologies
and hence a desirable alternative for energy storage,
especially in vehicles (such as electric and hybrid
vehicles) and consumer electronic devices (such as
smartphones, laptops, power tools, cameras) where
weight and durability are crucial factors.
Figure 9: Global electric vehicle growth over the last 5 years by country
Source: IEA, Global EV Outlook 2016
Figure 10: Global electric vehicles growth over the last 5 years by type
* PHEV = plug-in hybrid electric vehicles; *BEV = battery all electric vehicles
Source: Wood McKenzie
Types of electric vehicles. Electric vehicles can be
grouped into three main categories:
www.vested.com.au
6 Vested Research
1) Electric Vehicles (EV): are entirely electric vehicles
with a main electric propulsion mechanism and possibly
a smaller gasoline engine to support battery recharge or
provide engine power upon battery depletion. Electric
vehicles consume ~10-20 kg of lithium per vehicle/
2) Hybrid Electric Vehicle (HEV): are electric vehicles
which combines an internal combustion engine (ICE)
and electric power for propulsion. Hybrid electric
vehicles consume ~0.5-2 kg of lithium per vehicle.
3) Plug-in Hybrid Electric Vehicles (PHEV): are electric
vehicles which allow the vehicle’s battery to be
recharged by plugging the vehicle into an electric
system. Plug-in hybrid electric vehicles consume ~1.8-
4.2 kg of lithium per vehicle.
Figure 11: Types of electric vehicle transportation
Source: FMC, SignumBOX, IDTechEx, Boston Power
Power storage. An area of growth not discussed
thoroughly in this report is the use of lithium in
renewable energy and energy storage. signumBOX
expects power storage applications to grow to 7.5ktpa
LCE by 2025.
www.vested.com.au
7 Vested Research
Figure 12: Grid, Solar, and Nuclear Applications
Sources: FMC, Sandia National Laboratory, CSP Today, Altran, Greenpeace, IEA
Decline of EVs from 1910s. The first electric car powered
by batteries was built in 1837. By the 1890s, there were
actually ten times as many electric cars sold as gasoline
cars with ~40% of total cars in the US being electric
around the 1900s. However, according to Wood
McKenzie, the emergence of gasoline-powered cars was
the result of: 1) mass production with improved modern
assembly lines for gasoline-powered cars resulting in
reduced costs of production; 2) a significant number of
oil exploration discoveries; 3) improvements and
increasing prevalence of petroleum-based
infrastructure over charging infrastructure (which is
crucial for electric vehicles with significant
distance/range restrictions); and 4) superior driving
distance possible for gasoline-powered cars.
Figure 13: The revival of EVs to rival traditional internal combustion engine (ICE)
vehicles
www.vested.com.au
8 Vested Research
Source: Wood McKenzie
Continual re-emergence of EVs since 2010. Though
internal combustion engine-based vehicles have been
increasingly reliable and affordable, the continuing
resurgence in electric vehicles in our view, is the result
of:
1) Sustainability and environmental agenda: increasing
acceptance of climate change science, awareness of
‘sustainability’, and increasing acceptance and attraction in
operating a cleaner energy vehicle beyond environmentally
conscious consumers have contributed to an increase in
electric vehicles on the road. This trend has been reflected
in policy and regulation as regulators look to force
automakers to improve mileage per gallon. In the US, for
instance, regulators have compelled automakers to improve
mileage from 30 miles per gallon (mpg) to 38 mpg by 2020
and 54.5 mpg by 2025. European regulators likewise, have
compelled automakers to improve mileage from 42 mpg to
58 mpg by 2020. Although the 2025 targets for Europe may
change, the currently contemplated target is 71-81mpg. As
such it is inevitable that the marginal cost of conventional
internal combustion technology will increase significantly.
Indeed, US and Europe electric vehicle sales have been
driven by regulatory changes, in our view. Whilst, in
contrast, China electric vehicle sales are driven by
government subsidies and purchasing quotas on traditional
vehicles in Tier I cities. Subsidies for commercial and
passenger electric vehicles can be as high as 60% of the
www.vested.com.au
9 Vested Research
selling price of a commercial vehicle, or ~40% in the case of
passenger vehicles.
Figure 14: Corporate average fuel economy standards by country
Source: GFEI
Figure 15: Summary of policy mechanisms for Electric Vehicle uptake by country
(2015)
Source: International Energy Agency, Global EV Outlook 2016
www.vested.com.au
10 Vested Research
Figure 16: Examples of Chinese policies tackling traffic and air pollution issues by
restricting opportunities to own conventional internal combustion engine cars by
restricting availability of license plates and waivers for new energy vehicles
Source: International Energy Agency, Global EV Outlook 2016
2) Improved electric vehicle features… relative to internal
combustion engine vehicles such as pricing (which is
largely due to increasingly lower battery costs), extended
range and stronger performance have resulted in making
electric vehicles a more feasible purchase for consumers.
Figure 17: Evolution of battery energy density and cost
Notes: USD/kWh = United States dollars per kilowatt-hour; Wh/L = watt-hours per litre.
PHEV battery cost and energy density data shown here are based on an observed
industry-wide trend, include useful energy only, refer to battery packs and suppose an
annual battery production of 100 000 units for each manufacturer.
Sources: IEA, Global EV Outlook 2016
www.vested.com.au
11 Vested Research
Figure 18: Features of the Tesla Model 3
Source: Wood McKenzie
3) Increasing prevalence of charging infrastructure and
facilities… Growth in publicly accessible charging facilities
have mirrored the growth trend of the electric car stock.
The total number of electric vehicle supply equipment
(EVSE) outlets available in 2015 reached 1.45 million, up
from 0.82 million in 2014 or 20k in 2010. Furthermore, in the
US, there are presently 21,846 alternative fuel stations
(excluding private stations). Of that, 14,496 (or 66.4%) are
electric stations. There are also 36,650 charging outlets in
the US.
Figure 19: Global electric vehicle supply equipment outlets from 2010 to 2015
Sources: International Energy Agency analysis
www.vested.com.au
12 Vested Research
Figure 20: Geographical distribution of the 2015 stock of electric vehicle supply
equipment outlets by charger type
Note: Private chargers are estimated assuming that each EV is coupled with a private
charger.
Sources: International Energy Agency analysis
Figure 21: 21,846 alternative fuel stations in the US (excluding private stations)
Source: US Department of Energy
www.vested.com.au
13 Vested Research
Lithium-ion has secured its
position as the chemistry of
choice for electric vehicle
batteries
‘Lithium-¬ion batteries’ is a generic term for batteries
where electric and chemical properties depend on
lithium. Lithium-ion battery cells are comprised of four
main components: (1) cathodes; (2) anodes; (3)
separators, and (4) electrolytes, which are inserted into
various container types (cylindrical and prismatic
containers). Cathodes, anodes, and separators take the
form of sheets, and are either wound or stacked to form
alternating layers of cathode–separator–anode, with
ions flowing between the cathode and anode sheets via
an electrolyte solution. Lithium-ion batteries are
primarily utlised in consumer electronics applications
due to their high energy density and lifecycle. Their high
potential power output also makes them well-¬suited to
particular automotive applications.
Figure 22: Types of Lithium-ion batteries (LIB)
Source: CEMAC
Lithium-ion has secured its position as the chemistry of
choice for electric vehicle batteries because: (1) higher
charge density: as lithium has the highest
www.vested.com.au
14 Vested Research
electrochemical potential of all metals; (2) lightweight:
as lithium has a low atomic mass; (3) rapid recharge:
short charge times; (4) longevity: high cycling ability (the
number of charge-discharge cycles that can be achieved
without capacity drops); (5) efficient discharge rate
(columbic efficiency); and (6) long storage: low self-
discharge that is less than half of NiCd and NiMH
chemistries.
Figure 23: Lithium-ion has secured its position as the chemistry of choice for EV
batteries
Source: Wood McKenzie
Cost of batteries. The purchase cost of an electric vehicle
is the greatest barrier to mass-market adoption with the
highest cost in manufacturing of electric vehicle being
the battery. No doubt, processes for manufacturing have
become more efficient with recent technological
advancements, whilst the cost of battery raw materials
have increased. According to Wood McKenzie, at a
US$100/kWh battery pack cost, electric vehicles are
expected to become competitive with traditional ICE
vehicles.
www.vested.com.au
15 Vested Research
Figure 24: Breakdown of Battery costs (2016)
Source: Wood McKenzie
Figure 25: Battery pack cost projections by manufacturers ($/kWh)
Source: Wood McKenzie
Opportunities to lower costs include: (1) increasing
competition from battery producers; (2) More
manufacturing capacity coming online creating
“economies of scale”; (3) development of next generation
technologies; (4) Increasing “cleaner” policies (resulting
in less carbon and lower air pollution) which incentivise
a trend toward electric vehicles; (5) Ability to “arbitrage”
stored energy into power market, by selling back stored
electricity to local utility.
Risks to delay cost reductions include: (1) Increasing
costs for battery raw materials with rising demand for
electric vehicles; (2) Lithium-ion components are not
commoditized or standardised with each component
www.vested.com.au
16 Vested Research
being specific to each batteries design/use; (3) Rising
lithium-ion batteries demand from other sub-sectors
such as power storage and consumer electronics.
From exploration and mining
to batteries
What is Lithium… Lithium is a metal with the lowest
molecular weight, but highest electrochemical potential
and largest specific energy per weight of all metals.
These properties (power density and high energy) make
lithium relative to other metals, ideal for use in
lightweight batteries. Raw lithium itself is rarely used
but instead processed into different chemicals for a
variety of uses. Two chemicals used for rechargeable
batteries are lithium carbonate (Li2CO3) and lithium
hydroxide (LiOH). The end result of a battery begins with
exploration and mining of lithium, and processing.
Figure 26: From resource exploration and mining to lithium-ion batterie
*Note: lithium brine deposits are accumulations of saline groundwater that are
enriched in dissolved lithium
Source: CEMAC, Wood McKenzie
www.vested.com.au
17 Vested Research
Lithium Mining and
Processing
Battery grade lithium hydroxide and carbonate can be
produced from both mineral deposits and brines, with
lesser processing required for brines than mineral
deposits. Indeed, lithium in meaningful quantities is
found in one of two ways:
1) Mineral deposits (ores): are essentially hard rock
minerals predominately located in Australia, and extracted
via standard open pit or underground mining operations.
The ore is crushed before undergoing a standard
separation processes to isolate lithium from waste
materials (for conversion to lithium chemicals).
2) Brines deposits: are predominately found in the “lithium
triangle”, in Chile and Argentina (~58% of global reserves).
Lithium salts exist at or slightly below the surface and as
water evaporates, the mineral becomes concentrated in
water. Brines are generally more economical to extract
than mineral deposits. Lithium extraction involves ‘solar
evaporation’ to recover lithium from subsurface brines.
Water is pumped from reservoirs into evaporation ponds
which then crystalise with other salts. Thereafter, the
lithium chloride solution is pumped to a recovery plant,
washed with soda ash to precipitate lithium carbonate. It is
then dried and sold to downstream customers who
undertake further processing.
www.vested.com.au
18 Vested Research
Figure 27: SQM’s lithium solar solution production
Source: SQM
Supply
According to the US Geological Survey, lithium
resources discovered equate to 40 million tonnes and
reserves equate to 14.0 million tonnes, with ~85-94% of
the commercially viable concentrations at a limited
number of locations in Australia, Chile, Argentine and
China. Two brine deposits in Chile account for ~43% of
global production whilst 30% of supply comes from a
hard-rock mine in Australia. Lithium supply in 2015 was
~150-160kt.
Figure 28: Lithium supply by country (2014) (Total in 2015 ~150kt)
Source: Roskill
www.vested.com.au
19 Vested Research
Figure 29: Current Global Primary Lithium Production
Source: Wood Mackenzie; Thomson Reuters Datastream
Long lead times from exploration to production.
Meeting demand growth in the long term will be a
challenge for miners, as lithium operations have
significant lead times to develop and ramp-up
production. As an example, Orocobre developed the first
greenfield brine project the Salar de Olaroz project in
Argentina in over 20 years. It took ~8 years from initial
exploration and first production. No other major mined
commodity has managed to double in scale within the
timeframe required for lithium to meet current demand
requirements; even bauxite, the least capital intensive of
all mined commodities took nine years to double in scale
between 2004 and 2013.
We do not expect any new brine resource to come online
before 2020. In Chile, arbitration continues with CORFO
with no resolution in Atacama for SQM. In Argentina,
SQM continues to push Lithium Americas but no
additional supply is expected before 2019, and FMC has
plans for a hydroxide expansion but there are questions
over its brine source. In China, no significant production
is expected. In Nevada, US, development continues but
again no additional supply is expected in the short term.
Brine supply to come online between 2016-2020 include
Orocobre’s ~10kt LCE and Albemarle (La Negra) ~20kt
www.vested.com.au
20 Vested Research
LCE. We expect the 2016-2020 gap to be supplied by
Australian spodumene (from Galaxy Resources and
Neometals).
Figure 30: Significant lead times to develop – the Orocobre example
Source: Wood Mackenzie
Figure 31: Supply growth index for the major mined metals
Source: Wood Mackenzie
Figure 32: Supply growth to increase ~13% CAGR 2015-2020
Source: Benchmark Mineral Intelligence
www.vested.com.au
21 Vested Research
Cash cost of supply. At currently negotiated prices, the
premium over the production cost achieved by miners
should incentivise capacity additions. Mineral deposit
operations (relative to brine deposits) have higher cost of
production as costs are driven by a technically more
complex and energy intensive process to reach battery
grade lithium carbonate and hydroxide products.
Offsetting these costs is the benefit of by-products. For
instance, brine operations can additionally produce
potash and borates whilst mineral deposit operations
may produce tantalum and feldspar.
Figure 33: Lithium cost curve by company – brine < mineral deposits
Source: Roskill
Lithium Demand
Traditional use represents ~70% of demand. In 2015, the
market demanded ~150kt to ~190kt, ~70% for traditional
use in production of glass, ceramics, air
dehumidification, dyes, chemical synthesis of
pharmaceuticals.
www.vested.com.au
22 Vested Research
Figure 34: Lithium historical supply
Source: Benchmark Mineral Intelligence
But increasing prevalence of electric vehicles to boost
demand… Converters such as Ganfeng Lithium, Sichuan
Tianqi and Albemarle/GRM are driving demand. The
lithium content required by electric vehicles is
significantly disproportionate to traditional use. For
instance, pure electric vehicles require 8 to 40kg in
lithium versus 0.002kg in smartphones. Moreover, 14
countries have committed to quantitative electric
vehicle stock objectives with 13 million electric vehicles
expected to be on the road by 2020. Wood Mackenzie
expects electric vehicles (including PHEVs) to reach
~13% of new light vehicle sales globally by 2025. Indeed,
if new EVs from Tesla and other manufacturers spur
wider electric car adoption, then this could have
significant implications for lithium and battery raw
materials. Wood Mackenzie expects total lithium
demand to double before 2024, with two-thirds of that
growth coming from EV demand.
www.vested.com.au
23 Vested Research
Figure 35: Electric vehicle penetration (% global new vehicle sales)
Source: Wood Mackenzie; Thomson Reuters Datastream
Figure 36: Lithium demand (LCE kt) forecasts to 2020
Source: Albemarle
www.vested.com.au
24 Vested Research
Figure 37: Wood Mackenzie forecast lithium demand (LCE kt) to 2035
Source: Wood Mackenzie
Note: supply and demand are measured in Lithium Carbonate Equivalent tonnes (LCE)
Figure 38: 14 countries have committed to quantitative electric vehicle stock
objectives of 13 million electric vehicles on the road by 2020
Notes: * This target includes 4.3 million cars and 0.3 million taxis and is part of an
overall deployment target of 5 million cars, taxis, buses and special vehicles by 2020.
** Estimate based on a 10% market share target by 2020.
*** Estimate based on the achievement of the 3.3 million EV target announced to 2025
in eight US states. All indicators in this table refer to the eight US states; market share
and stock share are assumed to account for 25% of the total US car market and stock.
Source: International Energy Agency
www.vested.com.au
25 Vested Research
Figure 39: According to the IEA, meeting 2020 deployment targets requires a sizeable
growth of the electric car stock. Thereafter, meeting 2030 decarbonisation and
sustainability goals requires a major deployment of electric cars in the 2020s.
Source: International Energy Agency
Lithium-ion mega factories are coming. Over US$20
billion have been committed to establishing lithium ion
battery mega factories, which have the intention of
expanding cell plants from megawatt to gigawatt
capacity.
Figure 39: Lithium-ion mega factories to come online
Source: Benchmark Mineral Intelligence
www.vested.com.au
26 Vested Research
Lithium Prices
Price support driven by long lead times for supply to
come online coupled with increasing demand… The
prices of lithium carbonate and hydroxide are
negotiated individually through contracts between
buyers and sellers. Hence, there is little transparency in
pricing. In our view, with long lead times for projects,
prices should be supported between 2016-2019 with
some impact from supply coming online around 2020
from brine projects.
Figure 40: Benchmark Mineral Intelligence Lithium Pricing Forecasts
Source: Benchmark Mineral Intelligence
www.vested.com.au
27 Vested Research
Figure 41: Benchmark Mineral Intelligence lithium price forecasts with peak of in 2017
Source: Benchmark Mineral Intelligence
www.vested.com.au
Contact Us:Office: Level 11, 50 Cavill Avenue, Surfers Paradise, QLD 4217
Email: [email protected]: 1300 980 849
Vested Equities Pty Ltd holds an Australian Financial Services License 478987. All advice (if any) is general advice only. Your personal circumstances and financial
objectives have not been taken into consideration. Accordingly you should consider if the advice is right for you. Past performance is not a reliable indicator of future
performance. Please be aware that all investment and trading activity is subject to both profit & loss and may not be suitable for you. All advice and education content is of the nature of general information only and must not in any way be construed
or relied upon as legal, financial or personal advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake
your own investigations and obtain your own advice regarding the suitability of this product for your circumstances.