As the chart below shows, the demand, real and speculative, for lithium continues to drive prices materially higher. As new EV models prepare to launch this year and new battery facilities come online there is an inevitable supply chain impact to build inventory, whether it is the battery facilities building an inventory of lithium and other components or the automakers building an inventory of batteries. This will inflate lithium and other critical material demand relative to the vehicle output and this may be driving some of the demand panic for lithium. However, this dynamic is unlikely to be transitory in the near term, as there is a long wave of new EV capacity coming online, all of which will drive some incremental working capital build. We still believe that supply growth for lithium is very high and that the market could flip from famine to feast and back again quite quickly and frequently over the next few years although maybe not in 2022. Also see today's daily report and last week's ESG and Climate report for more on this topic.
We are going to focus our Sunday Thematic this week (will be found here) on a couple of related topics: alternative technologies that only make sense when prices are high, and whether this has changed with ESG and climate pressure, and ESG solution fixation – “methanol is the only solution” – see infographic below – or it’s hydrogen or ammonia or batteries. Sticking with the theme that seems to have hit a chord with COP26 attendees and something that we discussed in a report around carbon capture several months ago – we cannot let a foolhardy quest for “perfect” get in the way of more economic “good enough” solutions. The emission issues are generally site and process specific and different solutions will be more practical and affordable for different processes and in different geographies – there is no “one size fits all” solution.
The battery storage investment chart below is interesting in that it shows significant pairing with Solar facilities and less with wind. If we are to meet the green hydrogen goals that many are optimistically predicting over the next 10 years, then the new wind and solar investments need to be paired with hydrogen and hydrogen-based swing power generation capacity. This is the only way that countries will develop effective hydrogen grids. Simply having one or two large hydrogen facilities and/or import facilities will result in very inefficient distribution models either for fuel cell vehicles or for heating and swing power generation. A distributed network for hydrogen makes much more sense and modular electrolyzers coupled with modular hydrogen power generators is a more holistic model, with much more flexibility than adding batteries. Granted, the battery technology is tested and available today, but the broader ambitions for hydrogen will not be met if we do not get out of the blocks soon.
If we look at the battery storage projects highlighted in today's daily report and in the Exhibit below and then read some of the raw material inflationary concerns around batteries, we conclude that batteries will likely not end up dominating the power storage market. Both hydrogen and hydraulic-based storage are likely to be competitive if the battery costs do not come down. Note that storage batteries can afford to compromise on technology as they do not need leading-edge density – weight is not an issue for something that is not going to move. Even so, with battery demand expected to grow rapidly for EVs, it is not hard to see a scenario where other means of fixed location energy storage are more attractive.
One of our concerns with the Lithium hype has been what we perceive to be very low barriers to entry – coupled with significant momentum from lithium ultimate end-users to encourage more production. If we look at the linked GM announcement, the company is making exactly the right strategic move. Providing some funding, but more importantly, high-level credibility for a new US-based project that could dwarf other US initiatives. While GM may have contracted all of the lithium volumes from this project, it is unlikely. GM’s interest, which should be aligned with all the other automakers is to ensure an ample to surplus availability of lithium long-term to keep pricing low. Investing a few million to give legitimacy to a new large project may have huge potential longer-term benefits if the capacity helps maintain a longer-term surplus market. While there may be some special sauce in the technology required to make the lithium grades for higher-end and higher density batteries, the bulk of the auto market is likely to trade range for cost in its battery decisions – and at the less expensive end, the lithium barriers are very low, with other brine-based projects under consideration and likely to find funding.
One of the themes that we have focused on in our ESG and Climate work is the lack of realism in the Biden climate plan as it relates to power generation and the same with the plan in California. The more limited reliability factor in renewable power (because of its dependence on cooperation from the weather), means that you have to build a lot more new power capacity than you are replacing and you need to build a storage system for the power – batteries, hydrogen or hydraulic. This gets very expensive and will be more so if the push drives inflation in raw materials – which is already a factor YTD in 2021. Natural gas turbines are a cleaner and reliable source of power and cleaner still if combined with CCS. Politicians in the US are taking a considerable risk by promoting plans that could leave the power grid more vulnerable to some of the issues that we have already seen over the last 12 months (California and Texas). Of course, as the plans call for natural gas phase-outs in 10-12 years, none of those making the decisions today will be in the office to face the consequences!