Automakers like General Motors and Ford have wowed Wall Street with flashy EV designs, technical prowess and plans to invest tens of billions of dollars. Yet they've literally put the cart before the horse: the lithium batteries needed to power the electric vehicle revolution.
Now investors are starting to say: "Show me the metal." Among many key materials, lithium is the most indispensable.
Traditional automakers have hastily announced plans to build 13 lithium-ion battery plants in the U.S. by mid-decade. The planned ramp of EV production will triple demand for the light, silvery white metal by 2025. Yet supplies of lithium have little chance of keeping up.
Growing doubts about aggressive EV targets have contributed to a dive in General Motors and Ford Motor, along with shares of upstarts like Rivian and Lucid. Meanwhile, unquenchable demand and soaring prices have sent EV materials stocks including Albemarle, Lithium Americas Corp. , MP Materials and Sociedad Quimica y Minera de Chile on a wild ride.
Lithium Shortages To Slam Brakes On EV Adoption
With a single lithium mine operating in the U.S., one nickel mine, and one major source of rare earth magnets — MP Materials' Mountain Pass, Calif., site — EV and battery capacity is being planned without regard to the serious shortage of necessary raw materials.
Automakers, anxious to avoid a replay of the production halts forced by the chip shortage, are in "a quiet mad rush" to line up lithium, permanent magnets and other key materials for EVs, MP Materials CEO James Litinsky said in a Jan. 25 Baird technology conference presentation.
Nevertheless, Litinsky feels sure, "There's going to be a freakout moment" — perhaps multiple moments — when the EV supply chain fails spectacularly.
That freakout moment may come soon. Morgan Stanley analyst Adam Jonas wrote on March 8 that he sees "an ever-widening gap" between feasible supplies of lithium battery metals and ambitious EV production targets. GM aims to sell 1 million EVs in North America in 2025. Jonas sees around 300,000 as realistic. Ford has a 2 million EV output target for 2026, four times what he expects. Tesla, which seems to announce a new nickel or lithium supply deal every month, and Chinese EV makers have been "locking up the capacity slots," Jonas wrote.
Tesla CEO Elon Musk has mulled getting into lithium mining directly on multiple occasions. EV and battery giant BYD, backed by Warren Buffett, recently won a Chilean lithium extraction contract.
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Lithium Supply Limits
Basic math shows why the U.S. and the world are in such a deep hole when it comes to EV materials.
While lithium battery plants take a couple years to build, new lithium mining projects can take five to 10 years to come online — if all goes well. On top of that, facilities for processing the concentrate extracted from natural brines and pumped into evaporation ponds can take a couple of years. After that, as Albemarle president of lithium operations Eric Norris explained on the Q4 earnings call, it takes another six months for EV battery makers to sign off on lithium quality, followed by two years to ramp up to capacity.
The "practical realities of capacity limitation" haven't changed, despite exploding demand, Norris said.
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Albemarle Output Falls As Lithium Price Spikes
Albemarle stock plunged Feb. 16 on a lower-than-expected profit outlook despite soaring lithium prices. That offered a jolt of reality about the industry's ability to keep pace with surging lithium battery demand.
Industry conservatism, instilled by earlier lithium price collapses, has been slow to melt away.
The lithium extraction industry was historically an "oligopoly" with a supply-demand balance that was easily upset, Jonathan Evans, CEO of Lithium Americas, a relatively new kid on the block, said in a March 3 Kitco News interview.
As a result, investment "has lacked in this industry for more than a decade."
That's why, though there are sufficient lithium deposits in nature, the price has gone off the charts. The lithium carbonate spot price in China has surged about 500% over the past year to around $75,000 a ton.
Albemarle is among the industry's most experienced operators with some of the world's best lithium hardrock and brine assets. Yet some have sat idle, waiting for higher lithium prices.
Now, after a couple of false starts for the EV transition, much-higher prices have arrived. Albemarle looks well-positioned to capitalize. Yet its lithium shipments fell 5% last year.
Accelerated investment in lithium mining and processing would have had to start five years ago to meet automakers' demand projected for 2025, analysts say.
Instead, the lithium industry hit the brakes after prices crashed in 2018 and remained moribund until late 2020. The crash came as several Australian lithium mines started producing, flooding a market that had yet to see EV demand take off.
Albemarle looked past the crash, buying a 60% stake in the Wodgina lithium mine in Western Australia for $1.3 billion in 2019. But it immediately mothballed output. Lithium production will finally resume next month.
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Lithium's NIMBY Problem
Yet there's no timetable to reopen Albemarle's Kings Mountain, N.C., lithium mine. It closed in the 1980s, when the company's lower-cost brine operations ramped up in Chile. Last month, Albemarle reportedly paid tens of millions of dollars to buy adjacent land as it mulls a restart — but not anytime soon. The land now houses a drive-in theater, which under the deal can keep operating through 2026.
Albemarle said it would "engage with the community fully and transparently" before filing any permit applications.
Down the road in North Carolina's Tin-Spodumene Belt, the permit process grinds on for a proposed Piedmont Lithium open-pit mine. In 2020, the company announced a deal to supply Tesla with spodumene concentrate for processing into lithium hydroxide. The timing of initial deliveries, once expected by mid-2023, is uncertain.
Meanwhile, Europe's biggest proposed lithium mine has been shelved indefinitely after Serbia revoked permits for U.K. mining giant Rio Tinto amid environmental protests.
Litigation is holding up the biggest-known U.S. lithium deposit. Native American tribes have challenged the outgoing Trump administration's January 2021 approval of Lithium Americas' Thacker Pass, Nev., project. That project could power 1.5 million EVs a year if ever fully developed.
The project required developing a new process for extracting lithium from soft clay associated with volcanic activity. Lithium Americas will build a sulfuric acid plant on site for leeching, or separating out the lithium compounds for processing. The company expects a final ruling this summer. Still, the complexity of the project, already 13 years in the making, likely means "minimal output" before 2026, Deutsche Bank analyst Corrinne Blanchard told IBD.
The 'Saudi Arabia Of Lithium'?
The Biden administration, while supportive of Thacker Pass, would prefer to talk about the Salton Sea in California's Imperial Valley.
Companies including Berkshire Hathaway have already built power plants there, harnessing the steam that bubbles up when they inject water into geothermal formations. That brings up brines rich in lithium — potentially enough to generate 600,000 tons of lithium carbonate per year, according to the California Energy Commission. That compares to about 500,000 tons utilized globally in 2021.
Gov. Gavin Newsom touts it as a potential "Saudi Arabia of lithium."
Yet industry analysts are more circumspect about how well technology for extracting that lithium will scale. "It has never been done, and I think they are going to face some technical challenges and delays," Blanchard said.
The first Salton Sea lithium output may come in 2024 from Controlled Thermal Resources. In July, GM announced a multimillion-dollar investment in the company, saying it could yield "a significant amount of GM's future battery-grade lithium."
Berkshire plans to test two pilot-scale lithium extraction plants this year. If all goes well, commercial operations could begin in 2026.
The Smackover formation in south Arkansas offers another possible lithium source. Some companies including Albemarle already process bromine out of brine.
"We're already kind of pumping the brines around. So we'd be in a good position to leverage" the bromine operation, Albemarle's Norris said last August. But given the technical challenge and cost, he said the project may not happen until late in the decade.
Standard Lithium has been testing the waters, however. It recently agreed to build a plant to extract lithium out of leftover brine from a Lanxess bromine plant.
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'Safe' Lithium
What if the new technologies for tapping lithium resources such as geothermal and direct lithium extraction — which skips a multimonth brine evaporation stage — aren't ready for prime time?
Automakers securing lithium to cover needs over the next five to seven years should "make sure your eggs are in the safer basket" — hard rock and traditional brine projects — advised Benchmark Minerals CEO Simon Moores on the Clean Power Hour podcast in March.
"Safer" might also allude to geography. Albemarle and SQM, the other member of the lithium oligopoly, have played down concerns about doing business under Chile's new leftist president, Gabriel Boric. Argentina is an up-and-coming lithium capital. But Bolivia, the third country in the "lithium triangle," has failed to tap its potential, with politics and infrastructure standing in the way.
China is by far the biggest processor of lithium chemicals. But it gets most of its feedstock from Western Australia. Now, as processing capacity comes online in Australia, Chinese battery makers may be getting nervous about future lithium needs. Some are joining bidding wars for lithium mining operations to secure supplies that are seen as part of a broader geopolitical and technological contest between the West and China.
Biden Makes Lithium Push
President Biden on March 31 invoked the Defense Production Act, raising the shortage of lithium and other key EV materials to a national-security-level concern. The move acknowledged what numerous industry analysts have been saying: The great EV race will likely send some entrants skidding off the track.
Without government action, the mining industry "cannot reasonably be expected to provide the capability for these needed industrial resources, materials, or critical technology items in a timely manner," Biden's March 31 order states.
Biden's order, sought by Sen. Joe Manchin, D-W.Va., opens access to a $750 million Pentagon spending account for critical strategic materials. The funding will help pay for feasibility studies to prove the economics behind proposed mines. Notably, the White House assured environmental groups that the national-security declaration won't lower permitting standards.
"This will likely oil the wheels of domestic mining and refining but still needs huge capital support on the (order of) tens of billions of dollars to make this work," Benchmark's Moores tweeted.
More support for mining and processing lithium battery minerals might come from Congress. But such funding — along with generous EV tax credits — hinges on a grand bargain sought by Manchin that may also boost fossil fuel output.
Lithium Stocks
Uncertainty over federal support has added volatility to lithium stocks. After surging 35% in March, in part on Biden invoking the DPA, Lithium Americas stock has lost 22% in April.
After Albemarle's earnings warning dragged down other lithium stocks, the group bottomed as oil prices spiked on Russia's Ukraine attack. SQM stock has been the star among lithium stocks recently, rising 70% this year. That partly reflects its planned lithium capacity expansions and surging lithium price, but also its booming fertilizer business.
Among development-stage lithium stocks, Piedmont Lithium has been a recent standout as it executes on four lithium projects.
Meanwhile, MP Materials stock has been a strong performer in 2022.
The Global X Lithium & Battery Tech ETF is not far from its recent March lows. LIT boasts Albemarle, Tesla and SQM as its top three holdings. The ETF also owns stakes in BYD and several Asian battery makers that don't trade in the U.S.
The VanEck Rare Earth/Strategic Metals ETF recently pulled back from a long-term high. REMX owns MP stock, but also several Chinese rare earths firms.
LFP Batteries Use No Cobalt, Nickel
Chinese battery makers, along with Tesla, have had the most foresight in procuring lithium and other key resources. Yet supply limitations are forcing them to be flexible — and get creative.
Amid rising prices and short supply of high-grade nickel — even before the Russia-Ukraine conflict — Tesla decided to make a switch. For standard-range Model 3 and Model Y vehicles, Tesla is buying LFP, or lithium iron phosphate, batteries from CATL. Previously, Tesla only used a lithium-ion battery with a nickel, cobalt and aluminum cathode. The LFP batteries are lighter, safer and longer lasting, but they deliver somewhat less range.
China's BYD is on the verge of becoming the biggest EV maker thanks in no small part to its massive investments in its Blade batteries, an LFP variety. Toyota is set to use Blade batteries in an upcoming EV, and perhaps several more in coming years.
Yet all of those battery types use lithium, which accounts for only about 3% of a battery's weight. (That can add up: GM's Hummer EV battery weighs close to 3,000 pounds.)
Plan B For Lithium Shortage
CATL is thinking further afield. Last summer, it revealed progress toward a sodium-ion battery free of lithium, nickel or cobalt. Sodium is three times heavier than lithium and can't match lithium's energy capacity. But sodium is cheap and abundant. CATL is aiming for 2023 production.
"If lithium supply is unable to grow quickly, then automakers are going to have to start looking to other technologies," Morningstar analyst Seth Goldstein told IBD. Many scientists, funded with "a lot of R&D dollars," are working to find better chemistries that don't use lithium, he said.
Lithium, however, will be hard to displace because of its "huge head start."
Through scale, manufacturing improvements and other innovations, lithium-ion batteries have fallen from $1,200 per kilowatt-hour. The cost had been closing in on $100 per kWh — before the latest spike in battery metal costs.
Recycling lithium-ion batteries offers a partial solution. But the longevity of lithium-ion batteries means that recycling will barely scratch the surface of the supply shortage until next decade, Goldstein said.
Rare Earth Magnets
Among key EV materials, none are as crucial as lithium or have its hockey-stick demand growth. But rare earth magnets, key to optimizing electric motor performance, come fairly close.
Permanent magnet motors, in which rare earth magnets are attached to the rotor, have roughly a "90% market share," among EVs, says MP Materials CEO Litinksy.
The price of NdPr oxide, the key source for permanent magnets, has nearly tripled since late 2020. But that still only comes to about $100-$200 per vehicle, Cowen analyst David Deckelbaum told IBD.
Plus, "the magnets are there to offset the cost of the battery," by enabling greater range, he said.
In fact, some high-profile new EVs from both startups and traditional automakers "use more rare magnets, not less," Litinsky said.
The Rivian R1T has four permanent magnet motors. Tesla uses three permanent magnet motors to power its Model S Plaid.
In December, GM signed a long-term supply agreement with MP to lock in the rare earths materials needed to power the Hummer, Lyriq, Silverado and other upcoming EV models.
Currently, MP Materials ships the rare earth oxide it mines to China. But it's building processing capacity at the Mountain Pass site that will ramp up in 2023. Some of that NdPr oxide output will feed a metal, alloy and magnetics plant being built in Fort Worth, Texas, which will be able to power a half-million EVs a year.
Those plants will have to multiply. Litinsky figures it will take "three Mountain Passes" to transition the U.S. auto fleet to EVs, but nothing like it is on the map.
No Quick Fix
Lithium and rare earth materials producers such as Albemarle and MP Materials should enjoy strong pricing for years to come. Given the sudden race to build EVs and the long lead times to increase lithium and other key materials, another supply crisis seems inevitable.
In coming years, EV winners and losers will depend much less on who has the best technology than on who has the materials needed to get their cars to market.
