While the Piedmont Lithium analysis below makes for a compelling graphic, lithium has been a globally traded product for decades and there is an expectation that the growing lithium demand in the US will be largely met through imports. One of the significant positives of the Piedmont analysis is that it shows that US producers should have some sort of margin umbrella associated with pricing being based on import economics. That may not seem important today, given the extremely high price of lithium, but it will be important when lithium is oversupplied, which in our view is an inevitability – eventually. The barriers to entry for lithium are low and the buyer enthusiasm for new projects is very high. At some point, we will overbuild relative to demand and the net short nature of the US market may be critically important to companies like Piedmont, whose costs may not be the lowest. For more see today's ESG and Climate report.
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.
In our EGS and Climate report yesterday - Lithium – A “Special” Commodity For Now – Adding To Inflation – we talked about the current spike in lithium pricing but at the same time talked about the likelihood of lithium moving from famine to feast over the next few years and the potential for significant price volatility. This is a product for which demand growth is very high but supply growth is also very high. There are also some very divergent views of supply-demand and we highlighted a view that was bearish for lithium in yesterday's piece and show a bullish one below. The automakers and battery makers want to promote the idea that lithium will remain in short supply, as they need to encourage as much investment in lithium production as possible. While the incumbents want to keep pace with growing customer demand, they would like to see fewer new plays and are naturally conflicted in what message they want to give. We foresee supply and demand falling in and out of balance several times over the next 10+ years.