2018 was another defining year for the lithium chain supply as the global population continued to make remarkable strides towards the implementation of clean energy and t ransportation. Although the clean energy and transportation industries are only in their early days, it has become apparent that the shift that has started is an irreversible trend, one that has begun to disrupt many established industries.
Many of the headlines in the clean technology space have evolved around the electrification of the passenger vehicle market. This is a very significant and immediate opportunity for the lithium supply chain. However, it is in my opinion that there are a large number of applications, both mobile and stationary, which are going to benefit from decreasing hardware costs coupled with new software platforms. Governments around the world have also taken firm action to expedite the implementation of these new technologies.
As a result of decreasing hardware costs, the emergence of innovative software platforms and the need to increase renewable energy generation, growth in lithium battery use will not be limited to e-mobility. The need to bring clean energy technologies to urban environments has also spurred the demand for lithium batteries and associated technologies. High-density urban and commercial environments most urgently require clean energy and transportation solutions, but are generally the most difficult environments into which to deploy such technologies.
A long list of headlines in 2018 proved out that lithium battery -based products are positioned to replace traditional technologies, such as lead-acid, and to open entirely new markets in the energy industry, such as Virtual Power Plants (VPP). Other breakthrough lithium battery -based technologies that have benefited from decreasing battery cost include: solar powered standalone (off-grid) electric vehicle charging stations, residential- and utility-scale stationary energy storage systems, microgrids for remote and underdeveloped regions of the world and commercial energy systems to support the integration of electric vehicle truck and bus fleets.
Electrovaya (OTC:OTCQX:EFLVF) lithium battery packs for material handling vehicles - Photo credit Electrovaya
Of course, this is only a sample of projects or products related to the transition to e-mobility and clean technologies. For example, the material-handling vehicle market, which sold 1.1 million vehicles (20-40KWh/unit) in 2017, had nearly zero percent lithium battery penetration rate.
It is the same story for the 180,000 refuse trucks that are in operation today in North America; likewise for the global ferry fleet. Although these appear to be less commonly referenced applications, they collectively amount to a massive opportunity for the lithium supply chain. Consider that various boat-building companies have announced new electric options that are equipped with between 500KWh to 5MWh per unit – an incredible amount of battery power per unit!
Vanadium battery hype in 2018
Despite significant promotional activity issued around vanadium-based flow battery technologies in 2018, the industry has seen very little investment in the technology with nearly no quality or bankable companies working on developing products. It is clear that lithium-based batteries have won the race to commercialization and will remain at the forefront for at least the next decade. A flood of second-life batteries will begin to emerge into the open market over the next 5 years, which suggests that alternative battery technologies may remain no more than development projects.
Lithium equities market readjust
Investors in the lithium exploration and production segment of the industry were rattled by fears of an oversupply that did not materialize. In fact, the fear of oversupply drove share prices to points low enough that they are actually discouraging new production. Junior exploration companies require strong prices and investment interest in order to attract new capital to complete work programs and to move their projects closer to production. Many lithium junior exploration companies were able to hit market capitalizations of nearly $100 million without ever completing any materially significant work on their projects. Retail investors were quick to buy into the concept that they had successfully identified the next SQM (SQM), leading to related projects popping up on all continents. To some extent, the bursting of the lithium bubble (what I call the lithium bubble 2.0) was very much required. Good quality projects and companies, such as Nemaska (OTC:OTCQX:NMKEF), have successfully attracted capital and continue to move forward.
Despite all of the news around growing demand for electric vehicles and various other lithium-based products, along with the announcements of battery manufacturing expansion plants from Tier 1 cell and battery manufacturers, the value of high-quality lithium exploration and production companies continues to decline. Although I do expect the news flow around new battery plant construction activity to escalate in 2019, it is not clear that investor interest will reemerge into lithium exploration and chemical producers. If interest does not reemerge, it may become difficult for juniors to attract the necessary capital creating a path to consolidation or acquisition.
Challenges bringing new lithium chemical supply to market
Australia-based Orocobre (OTC:OTCPK:OROCF), which is operating in the northwestern corner of Argentina, illustrated throughout 2018 how difficult it is to bring new lithium chemical supply to market. The company has defeated all odds by overcoming a long list of operational, environmental, financial and governmental challenges in bringing its world-class Olaroz lithium carbonate production facility to market. This was the first new lithium brine facility to enter commercial production in over 20 years. Despite the many successes that the company achieved, it has yet reached nameplate production capacity. Investors have consistently punished shares in the company. Obviously, this has had a negative impact on other exploration and early-stage producers in the region, including Advantage Lithium (OTC:OTCQX:AVLIF) and Lithium Americas (OTC:LAC).
Orocobre site visit 2017 - Argentina - Author Supplied
In CY Q1 2018, shares in Orocobre traded around the $7.00 mark, which was supported by an investment of approximately $300,000,000 by Toyota Tsusho (OTC:OTCPK:TYHOF). At the end of 2018, shares were trading at around the $3/ share mark as the company was hammered by a difficult political landscape in Argentina, by production challenges and by softer than expected pricing for its chemical products. Sales of lithium carbonate from the Olaroz lithium chemical plant are expected to be approximately 5,000 T for the December half year at a price of U$12,500 / T, which is a significant premium over their production cost of around U$4,000/ T.
Nemaska successfully raises $1.1 Billion
Canada-based Nemaska Lithium had a successful 2018 as the company attracted over $1 billion in capital commitments to build a vertically-integrated lithium chemical operation from mine operations to hydroxide or carbonate production. In addition to raising the necessary capital requirements, the company also attracted various high-quality off-take partners. This further shows the demand from various interested parties looking to secure supply for lithium chemicals. Despite the company’s successful execution of its strategy, 2018 was a bloodshed year for investors. Shares in the company entered 2018 around $2.20 / share and exited the year around $.60/ share but still maintain a strong market capitalization of around $500 million.
Nemaska Lithium - Whabouchi Site Visit Q4 2018 - Author Supplied
On the exploration side of the market, 2018 was a much quieter year than 2017. In 2017, many companies identified land packages and moved to assemble financing and exploration work packages. Although many companies delivered good exploration results, the market quickly determined that the proximity of lithium assets to infrastructure was critical.
Blast & Bulk Sample Work Program - Lithium Project - Vale D'Ore Mining District - Author Supplied
For the most part, shares in lithium exploration companies operating in remote parts of the world were decimated. Amongst the ruins remain some decent lithium exploration companies that are still well-funded and have delivered successful drill programs, such as Infinite Lithium (OTCQB:ARXRF), which is exploring the Jackpot property in Northern Ontario. In December 2018, the market capitalization of Infinite Lithium hit below $5million, presenting a good investment opportunity for an investor who believes that lithium exploration stocks have a role to play in the future of the lithium supply chain.
Battery manufacturers position for rapid expansion
On the battery manufacturing side of the lithium supply chain, 2018 was a defining year for all companies in common concerning the announcement of new production capacity. Throughout 2018, large players such as BYD (OTCPK:BYDDF), CATL, LG Chem (OTCPK:LGCLF) and many others announced their strategic plans to stay ahead of the industry. Expansion plans that were announced include LG Chem global expansion by 32GWh, CATL Chinese and German expansion by 38 GWh and BYD Chinese expansion by 60 GWh. Even these few lithium battery manufacturers have charted a path to over 100 GWh of battery expansion plans over the next few years. Beyond 2020, consider that CATL has already announced their intention to ramp-up their global lithium battery production to at least 100 GWh and Tesla (TSLA) has indicated that they will aim to increase GigaFactory 1 production output to 150 GWh. Related announcements in 2018 were driven months after many automakers announced their entrances into the electric mobility market, which illustrates how the supply chain was being impacted. Due to the rapid raise in electric mobility and growth in the residential- and utility-scale energy storage markets, supply of lithium batteries has fallen behind demand. This situation creates a considerable shortage of high-quality, bankable lithium batteries, especially in the NCM market. Lower-quality LFP battery modules from secondary suppliers have failed to achieve commercial success, thereby creating an oversupply of product located in China.
In 2018, the lithium industry saw strong interest from battery manufacturers looking to secure supply, which in turn led to merger and acquisition activity. As battery and material manufacturers announced production expansion plans, Tesla Motors, LG Chem, CATL, NorthVolt and many other players followed up with announcements concerning the supply of lithium chemicals. It is clear that long-term supply of lithium chemicals is critical for battery and material manufacturers. In fact, one of China’s leading NMC and LFP battery manufacturers, CATL, successfully completed their IPO in Asia, announced battery supply agreements with Tier 1 European automakers, announced new battery manufacturing facilities both in China and Europe and acquired a lithium-producing asset in the Vale d’Oro mining district located in Quebec, Canada. Although the Quebec lithium asset has a poor track record, it is presently shipping spodumene concentrate to China for processing, which is a precursor for entering into the battery supply chain. Chinese groups were also active in acquiring production and exploration assets in other regions of Quebec, South America and Australia. This illustrates that China is taking a long-game position on the lithium supply chain.
Charging technology industry receives growth capital
The electric mobility charging technology and infrastructure industry attracted growth capital and saw several acquisitions completed in 2018. Governments, utilities and automakers committed to the deployment of infrastructure, which I view as a gauge to determine how quickly electric vehicles will be taken on. California alone intends to deploy 1,500,000 zero-emission vehicles by 2025, growing to 5,000,000 vehicles by 2030, while Japan’s target is to establish 100% zero-emission vehicles by 2030. It is projected that there will be 40 million electric vehicle charging points deployed worldwide by 2030 to support the global movement towards electric drive vehicles.
Tesla EV charging station Ontario - Author supplied
The electric vehicle charging technology company Charge Point attracted a stunning $240,000,000 in growth capital in 2018. Such investments are expected to continue as New Jersey, California and New York announced in 2018 that they will spend a combined total of $1.3 billion on EV charging infrastructure. Further, a number of electric utilities across America that are set to benefit from an increase in electric demand announced that they will offer incentives or make investments to support the transition to electric vehicles. The same story has been echoed around the world, including in Italy where the major electric utility announced plans to install 14,000 charging stations.
Home Energy Storage is no longer a “cool toy”
All categories of the stationary energy storage market saw dramatic growth in 2018, especially in utility- scale ‘mega’ projects and in the residential market. In the German residential market, the industry surpassed 100,000 systems installed, while the South Australian government continued to promote its residential energy storage program, which aims to have 40,000 systems installed over the next few years. The Caribbean markets also saw a breakthrough as Puerto Rico and other islands moved to restore power grids after Hurricanes Irma and Maria. It was reported that all new solar installations in Puerto Rico are now being installed with battery systems and many existing system owners are retrofitting systems to include batteries.
Eguana (OTCQB:EGTYF) Home Battery System - Puerto Rico - Authored Supplied
“Mega Scale” utility projects take flight
The utility-scale segment of the stationary energy storage market has witnessed incredible demand and has had the most material impact on the lithium supply chain. Many utilities over the past 24 months have captured headlines by announcing what I define as mega-scale projects. In recent weeks, we have witnessed a California utility announce plans to deploy multiple energy storage parks amounting to 2.2 GWh of capacity. This is the equivalent of approximately 45,000 electric vehicles. These types of energy storage parks are quickly being financed while product is generally packaged as containerized solutions directly at or near the battery manufacturing plant. This allows for the solutions to be quickly installed, which creates a vacuum of demand over a very short period of time.
Solar PV ground mount install - Ontario - Authored supplied
According to one recent report, the US utility-scale energy storage pipeline amounted to over 30 GWh, which is equal to well over 500,000 electric vehicles. The other emerging trend over the past 24 months has been the attachment of very large utility-scale battery parks to renewable energy parks that include wind and solar generation. As an increasing amount of solar and wind technology is deployed, more batteries are required to control the flow of renewable energy production. The use case of lithium batteries without being attached to renewable energy sources is another hyper-growth market for the lithium supply chain, as utilities across the country have signaled their interest in deploying energy storage systems to offset the need to build additional Peaker Plants, or in some cases replace existing Peaker Plants. In 2018, the industry saw bold targets put forward by various governments around the world including: NY at 1.5 GWh by 2025, North Carolina at 1 GWh by 2030, South Africa at 2 GWh by 2021, Nevada at 4 GWh by 2030, Ireland at 400 MWh by 2021, California at 1.7 GWh by 2020, New Jersey at 2 GWh by 2030, MA at 500 MWH by 2023, and Arizona at 3 GWh by 2030.
Energy storage coupled with Solar PV will deliver low-cost, reliable energy to remote parts of the world, especially as second-life batteries hit the market over the next half decade. This will reduce the need for transmission lines and energy infrastructure and can be compared to the way that cellphones leapfrogged landlines in developing nations.
Electric buses remain a key growth market
Lastly, the electric bus market has reached a tipping point led by full fleet transition in China, with a very encouraging list of pilot projects by nearly all major North American and European transit authorities. Although North America and Europe have fallen behind China in electric bus production and deployment the stage is set for wide-scale adoption over the next 5 to 10 years. In 2018, it was announced that 4,000 electric buses would be deployed in Guangzhou, China, which illustrates the potential for electric buses in China. This represents another sizable market opportunity for the lithium supply chain.
The three categories of the bus manufacturing sector that I closely monitor are: coach, municipal and school bus. Although the replacement of the municipal bus fleets often captures the headlines, the largest opportunity is the North American yellow school bus fleet. It is in my opinion that an increasing number of transit authorities in Europe and North America will continue to announce pilot projects in 2019 with a spillover effect to other regions of the Caribbean and Latin America. In late 2018, Chilean officials announced the procurement of 100 electric buses, which indicates that demand for them is already rising in South America. The primary goal for the transition to electric bus fleets is to decrease ground-level emissions in urban and commercial environments. Major North American transit authorities, including Toronto, New York and Los Angeles have already outlined plans to achieve a zero-emission fleet between the years 2030-2040.
Montreal Electric Bus Charging Station - Author Supplied
I believe that the future of electric buses is only a question of when it will occur. I anticipate that sales will continue to grow given the current political support for them in combination with the declining cost of batteries and electric motors. In 2017 China deployed some 90,000 electric buses, while the balance of the world tested such platforms. These pilot projects will unleash a much broader opportunity, including 400,000 yellow school buses in North America and 900,000 European municipal buses. California recently committed to a 100% electric municipal bus fleet by 2029, representing 1,500 buses.
The transition to clean energy technologies is well underway. 2018 was another important year for the lithium supply chain as Tier 1 lithium battery production companies announced significant expansion plans and began to raise the necessary capital to deploy related strategies. The move to increase lithium battery production will ensure that supply is available to meet demand that arises from primary applications such as electric vehicles, which in turn will potentially increase supply for secondary applications such as stationary energy storage systems and EV charging infrastructure. Considering the slow ramp-up in global battery module and cell manufacturing capacity, and considering the rapid uptake of electric vehicles and mega utility-scale energy storage systems, it is difficult to visualize an oversupply of battery modules in the next years.
Most of the large battery and material manufacturers have already aligned themselves to secure lithium chemicals over the next years. China has already moved to increase its conversion capacity, which could prove to be a good supply source for domestic producers. Despite the ongoing fear of oversupply, margins for lithium chemical producers remain incredibly healthy with few Greenfield projects financed and expected to bring new meaningful production to market over the next 5 years. It is clear that demand for lithium chemical product will continue to rise as battery manufacturers move to increase supply of equipment to fulfill demand that is arising from the global shift to e-mobility and renewable energy generation. Global battery manufacturing capacity is expected to rise from 175GWh in 2017 to 630GWh by 2022 and grow to 2,000GWh by 2030.
Ultimately this will create demand for additional project expansion and create a pathway for new Greenfield projects to find their way to market. Although I do not expect 2019 to be a robust year for lithium exploration and production companies, there is no doubt that the ‘lithium bubble 3.0’ will emerge once the recently announced battery plants enter production and expansion plans are created.
2019 Outlook Include:
- Record number of electric vehicles sales in the global passenger market
- Increase in the number of electric vehicle options available to consumers
- Ongoing pilot projects and overall shift to electric municipal bus fleets
- Ramp in utility-scale mega-projects in the stationary energy storage market
- Hypergrowth in the residential energy storage (OTCPK:RESS) markets in Europe, USA, Caribbean and Australia
- RESS integration with Energy Block Chain / Virtual Power Plants, Internet of Things, Artificial Intelligence
- Strong advancements in the microgrid markets focused on providing energy access to underdeveloped and developing regions of the world
- Hyper-growth in the EV charging infrastructure Battery plant development, including: new facilities, facilities expansion, financing (capital raises), construction development and other related information
- Entrance of new players/countries into the lithium supply chain
- Mega-supply announcements throughout the supply chain (ie: cells, battery modules, chemicals)
Disclosure: I am/we are long ARXRF, EGTYF.
Additional disclosure: Author has relationships with multiple companies listed in this document. Author is an industry insider with over 10 years of related experience. Author has shares in multiple companies listed.