Analysis
1 Aug 19

As lithium prices plummet, will EVs become cheaper sooner?

In the first quarter of 2019, EV sales in number one electric car market China increased by roughly 90% compared with a year earlier. Strangely enough, that is indicative of a cool-down: the growth seen between 2017 and 2018 was twice as big.

At the same time the mining industry has been increasing lithium output significantly since mid-2018 in anticipation of a maintained or even accelerated EV sales momentum. The result: oversupply has caused the price of lithium ore to plummet 30% since mid-2018, after having tripled between mid-2015 and mid-2018, driven by speculation and high expectations as to the uptake of electric vehicles - which now proves to disappoint.

Increasing competition in the lithium industry

Still, the world’s biggest lithium producing countries, Australia and Chile, plan to further increase their output in the coming years.

In view of current EV sales, that might look bullish, but consultancies forecast that by 2030, electric vehicles will outsell conventional cars and require a tenfold increase in lithium battery supply. The big lithium players cannot afford to slow things down today if they want to stay on top, but that means less turnover and margins in 2019-2020.

Lithium prices are indeed likely to drop further in the coming year, but the question remains whether this price cut will lead to cheaper batteries. Today, Western car makers are on the short end of the stick because they need (a lot) more battery cells for their upcoming EVs. It’s a suppliers’ market: The Asian battery companies call the shots because OEMs have nowhere else to shop and supply is strictly controlled.

On the other hand, now that the demand for battery cells on the Chinese market is cooling down, the Asian suppliers may have to shift their output to the Western markets, which could spark competition and therefore lower prices.

Cheaper batteries or not

Lithium is just one of the raw materials needed to build a battery. Today, you also need cobalt. Interestingly, the price of the blue metal plunged from roughly €75,000 per tonne in the first half of 2018 to just €25,000 per tonne today. The story seems similar to that of lithium: speculation sparks more output and the output eventually outdoes demand.

If both lithium and cobalt prices are plummeting, that surely is good news for the EV buyer? Unfortunately, it is a bit more complicated than that. A battery pack comprises a lot more than just the cells, and cells are much more than the chemicals they contain.

In fact, the sensitivity of battery pack prices to commodity prices is much lower than commonly understood. “A 50% increase in lithium prices would for instance increase the battery pack price of a nickel-manganese-cobalt (NMC) 811 battery by less than 4%. Similarly, a doubling of cobalt prices would result in a 3% increase in the overall pack price. Yes, contracts may fluctuate depending on the underlying commodity price but not by as much as you might think,“ BloombergNEF Head of Energy Storage Logan Goldie-Scot writes.

Reversely, a drop in lithium and cobalt prices won’t have a significant impact on the battery pack. What will, however, is the relationship between price and volume. “From the observed historical values, we calculate a learning rate of around 18%. This means that for every doubling of cumulative volume, we observe an 18% reduction in price,” Goldie-Scot explains.

“Based on this observation, and our battery demand forecast, we expect the price of an average battery pack to be around $94/kWh by 2024 and $62/kWh by 2030.”

A final consideration: how will lower battery pack prices affect the end price of an electric vehicle? Again, it's all a matter of volume. Higher volumes means OEMs can lower the margins on EVs and hence the price of the car, helped by the decreasing cost of the battery pack. That is why electrification needs to be approached on a large scale - like VW is doing with its I.D. family. OEMs that limit their offer to what is legally required are likely to find themselves in a difficult position to compete with the volume EV builders.

Electrification is one of the main topics at the 2019 Fleet Europe Summit (6-7 November, Estoril, Portugal). Get your tickets now and learn how you can optimise your fleet and adopt electric vehicles.

Authored by: Dieter Quartier
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