Lithium: reactive?

mined lithium supply chain

Lithium demand is likely to rise 30x in the energy transition. So this 15-page note reviews the mined lithium supply chain, finding prices will rise too, by 10-50%. The main reason is moving into lower-grade ores. Second is energy intensity, as each ton of lithium emits 50 tons of CO2, c50% due to refining spodumene at 1,100◦C, mostly using coal in China. Low-cost lithium brine producers and battery recyclers may benefit from steepening cost curves.

Inflationary feedback loops increasingly matter in the energy transition. Decarbonization technologies themselves need to be decarbonized. But this tends to re-inflate their costs. Page 2 re-caps this issue and why it matters.

An overview of the lithium supply chain is spelled out on pages 3-7, across the three major categories of “brine”, “mine” and “refine”. In each case, we aim to highlight the key numbers and energy costs.

An economic model of mined lithium can thus be derived on page 8. We outline what price is needed for a 10% IRR across the value chain.

The first re-inflation risk is the direct cost of decarbonization, which is quantified on pages 9-10, including carbon prices, energy costs and materials costs.

The second and larger re-inflation risk is the need to move into lower ore grades, to meet a 30x increase in future lithium demand. This is quantified on pages 11-12.

The impacts on batteries and electric vehicles are then translated through on page 13. We conclude that OEMs may consider backwards-integrating, to secure supplies.

Who benefits? Steepening cost curves are best for those at the bottom of those cost curves. And possibly also for battery recycling. We have screened 20 companies and discuss our conclusions on pages 14-15.

Inflation: will it de-rail the energy transition?

Inflation from energy transition policies

New energy policies will exacerbate inflation in the developed world, raising price levels by 20-30%. Or more, due to feedback loops. We find this inflation could also cause new energies costs to rise over time, not fall. As inflation concerns accelerate, policymakers may need to choose between delaying decarbonization or lower-cost transition pathways.

The importance of costs on the roadmap to net zero evokes a surprising amount of debate. We re-cap these debates, including our own roadmap on pages 2-3. Recently, organizations such as the IEA have published a roadmap, which we believe will be c10x more expensive.

The inflationary impacts of energy transition can be compared for different levels of abatement costs. Hence we discuss the concept of abatement costs, including two paradoxes, on pages 4-5.

Top-down, we calculate that each $100/ton of CO2 abatement cost would likely lead to 6% aggregate price increases in the developed world, on page 6.

Bottom-up, we model that each $100/ton of CO2 abatement cost would lead to 2-70% price increases, across a basket of twenty different goods and commodities, on pages 7-8. The impacts are regressive and basic goods and staples rise more.

An additional source of inflation comes from supply-demand dynamics, as some materials will be dramatically under-supplied in the energy transition (page 9).

What does it mean for new energies? To answer this question, we bridge the impacts of all these cost increases in our models of wind, solar, hydrogen and batteries, on pages 10-12. There are surprising feedback loops, which could amplify inflation.

No brakes? We also find that the usual mechanism to slow inflation is blunted by the need for an energy transition, on pages 13-14. Hence if inflation accelerates, it could surprise by a wide margin.

Our conclusion is that policy-makers and companies should consider costs more closely, while there are measures for investors to inflation-proof portfolios.

Copyright: Thunder Said Energy, 2019-2023.