Despite the electric vehicle revolution sparking rapid development and growing demand for lithium, it differs from other EV-related metals such as copper by having no current traded price.
In today’s system of contract-by-contract pricing, demand uncertainty from the fast-growing EV market in turn generates supply uncertainty, with no forward price curve to allow for forward hedging.
Forward hedging, which requires a forward price curve, is a key facilitator of bank financing in the minerals sector. Without it, the danger is that supply isn’t going to be there to meet the exponential growth expected in the demand for EV batteries, and suppliers will miss boom cycles.
In a downcycle, low lithium prices then translate into low equity prices for junior mining companies, making it difficult for them to raise sufficient financing to bring new capacity to the market once the market moves from surplus to shortfall.
And established producers, even if they have latent expansion potential, will not be able to bring new capacity on stream fast enough, causing a lag in the supply response, which causes an oversupply, which then causes prices to bust. And around again we go.
In the past few years we have already witnessed unprecedented price volatility in the lithium market, driven by EV battery demand.
And the price volatility will only get worse. Plug-in EVs already make up 7.8% of all cars sold in California, but they are still at 2.1% nationally, and the market is forecast to grow at a CAGR of 21.1%.