Battery metals witness sharp correction, but downside may be limited

Battery metals cobalt and nickel have witnessed sharp correction in their prices over the past month, but their downside could be limited in view of an “exponential growth in automobile companies’ investment upstream”. 

Another critical raw material lithium has also seen some correction over the last few months from the record peaks witnessed in March. 

Green industrial revolution

Analysts say the offtake of electrical vehicles (EV) globally exceeded expectations last year and there could be a strategic push for further electrification of vehicles. According to Goldman Sachs Commodities Research, the battery metals will power the green industrial revolution, facing a wave of demand comparable to that of copper and iron ore during China’s rapid growth in the 2000s. 

Currently, lithium is quoted at 4,75,000 Chinese yuan ($70,798) a tonne down from its record high of 500,000 yuan ($74,525) in March. Cobalt is ruling at $60,460 against a four-year high of $82,000 witnessed in early June, while nickel on the London Metal Exchange ended at $21,776 a tonne on Wednesday, a drop of 25 per cent compared with prices a month ago. 

Earlier this month, Goldman Sachs Commodities Research warned “...we see the battery metals bull market as over for now. Crucially, with no prior large-scale demand or supply cycle behind them, these ‘new economy’ commodities have avoided copper and aluminium’s ‘Revenge of the Old Economy’ investment trap.”

Automakers’ investments

UK-registered Fitch Solutions Country Risk and Industry Research said over the past 18 months, a total of 21 investments have been made by automakers in upstream projects. “Automakers are using increased upstream investments and supply contracts to secure enough battery metals (lithium, cobalt and battery-grade nickel) to drive forward their respective EV policies and to meet the decarbonization targets set by governments globally,” the research agency said.

These investments have been made by companies such as BMW, General Motors, Tesla, Stellantis, Renault, Volkswagen, Toyota, BYD and Ford. Mining companies whose projects will directly supply materials to EV manufacturers have also made investments. They include Zijin Mining (Geely, BYD), Livent Corp (BMW, Tesla), Posco (Rivian, GM) and Rio Tinto (Stellantis, VW), it said.

According to ING Think, the economic and financial analysis wing of Dutch multinational financial firm ING, the global share in new registrations increased by 9 per cent in 2021 (6.6 million) against earlier expectations of 6 per cent (BNEF). “The global figure was supported by an acceleration in Europe (with a 19 per cent share) and China (14 per cent share),” it said.

‘Forward-looking equity’

Goldman Sachs attributed the rise in battery metal to a phenomenon that was exactly opposite to the one witnessed in copper and aluminium. A surge in “investor capital into supply investment” tied to the long-term demand for EVs, the metals that should have essentially been a spot-driven commodity behave like “forward-looking” equity. “That fundamental mispricing has, in turn, generated an outsized supply response well ahead of the demand trend in focus,” it said. 

Goldman Sachs sees a correction in these metal prices over the next two years with prices of spot lithium dropping to $16,732 in 2023 from this year’s average of $53,892 a tonne. Correction in cobalt will be limited, dropping to $59,500 a tonne next year from this year’s average of $78,500. On the other hand, nickel will average at $31,000 a tonne this year before dropping to $,30,250 next year.

Fitch Solutions said producers were focussing heavily on lithium as its mining sector has largely been underdeveloped compared with nickel, which will also be important for EV and battery manufacturers in the long run.  

Strong order book

ING Think said demand for EVs is strong and is supported fiscally. Volkswagen has an order book of 3,00,000 EVs for western Europe, which is thrice the global deliveries in the first quarter. Higher fuel prices, especially due to the Ukraine war, have also fuelled interest among consumers.  

Fitch Solutions said it estimated EVs to account for over 80 per cent of global lithium demand by 2030 and 19.3 per cent of nickel offtake. “Nickel will remain incredibly important to EV and battery manufacturers as nickel-based batteries remain the most popular chemistry amongst EV manufacturers,” it said.

The UK-based research firm said it estimated lithium nickel manganese cobalt (NMC) to make up between 70 and 78 per cent of global EV batteries by 2030, though lithium iron phosphate (LFP) cells will also increase in use. LFP batteries, estimated at 6 per cent of total EV batteries currently, will rise to 12 per cent by 2030.  

Supply growth

Goldman Sachs projected lithium supply to grow on average by 33 per cent, cobalt by 14 per cent and nickel by 8 per cent annually against annual demand growth rates of 27 per cent,  11 per cent and 7 per cent, respectively. It forecast a sustained surplus in all three metals over the next 1-2 years. “We expect these strong demand trends to continue, with the recent shifting focus from energy transition to energy security likely to spur increasing policy support for battery demand. However, we see a set of emerging more significant supply responses across the battery metals triggering a multi-year softening path for fundamentals,” Goldman Sachs Commodities Research said.  

ING Think, however, warned that high prices for battery metals could curb the electrification of vehicles as it makes them costly. The supply growth of these metals would not decline, though. 

Analysts point to the recent move by local governments in China announcing cash subsidies for those replacing petrol cars with new EVs as government measures that can hold the prices of these battery metals. 

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