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Integrated supply chain for battery manufacturers

· electric vehicles,investment,lithium

Summary

  • Vertical integration for supply of raw materials contributing to battery cathodes supports an environment of increasing competition.
  • Cathode material producers require long-term supply contracts for raw materials such as Lithium, Cobalt and Nickel.
  • Electrolytic Refineries constantly require higher of utilisation rates. 
  • Processing companies have the technical capabilities to bridge the product gap.
  • Exploration companies are in the best position to validate resources and reserves.

Recent prices drop to pull in demand

Lithium stocks have been dropping in value as more plans to increase supply and forecast drops in seaborne spot prices for the commodity cause a wave of uncertainty. China’s domestic spot battery-grade lithium carbonate prices also remain under downward pressure, with fewer suppliers making higher offers.

“Lithium carbonate prices keep falling week on week and have done at a faster pace in the last two weeks owing to thin buying activity,” a lithium producer told Metal Bulletin. “Our customers are unwilling to place long-term contracts due to the current continuous price decrease, and prefer to purchase materials on a weekly and monthly basis.

Despite, both lithium carbonate and lithium hydroxide demand are forecasted to increase significantly compared to other lithium compounds used mainly in industrial applications. According to Roskill, lithium hydroxide demand in particular is predicted to grow from the actual 25,800 t LCE in 2016 to over 1.6 Mt LCE by 2031, the demand for battery grade hydroxide is to grow at 38.8 % CAGR per year between 2016 and 2031. Lithium carbonate is predicted to grow from the actual 99,200 t LCE in 2016 to over 498,700 t LCE in 2031, the demand for battery grade carbonate os to grow at 13.1 % CAGR per year between 2016 and 2031.

Policies in China continue to supports long-term demand

China this year reported that they will require automakers to comply with a cap-and-trade auto emission rule starting from 2019, the Ministry of Industry and Information Technology announced on Thursday. Car companies with annual sales of more than 30,000 vehicles would have to meet a quota of 10 percent being New Energy Vehicles (NEV's), meaning all-electric battery vehicles or plug-in hybrids, it said in a statement.

That level would rise to 12 percent of sales in 2020, the ministry added, and automakers which weren't able to meet the quota would have to buy credits.

Over the long term, China intends to to shift away from high-speed growth towards slower growth and higher product performance in the long-term. Roskill is of a view that the future competitiveness of NEVs relies on improving factors such as the driving range, charging time and service life. Battery technology is crucial in the NEV industry. All of these ideas are supported by the more recent subsidies in China which, it is hoped, will result in enterprises developing more advanced technologies, especially regarding battery energy density. Subsidies for NEVs with driving ranges of more than 300km have become more preferential under the new policies, while producers of NEVs with less than 150km driving range have begun to use up their inventories.

Lithium-Cobalt benefit from push to higher densities

Both the lithium and cobalt markets have historically been driven by battery-demand, primarily from consumer electronics - representing 40 percent and 25 percent of demand respectively in 2017. However the growing adoption of EVs and need for higher density batteries will see the demand for lithium increase more than threefold from 214,000 t to 669,000 t over the same period, according to McKinsey's base case outlook. Their outlook assumes that Li-ion battery technologies will be the prevalent battery technology for the foreseeable future.

Pricing Lithium and Cobalt

Unlike many widely used materials in today's conventional vehicles, such as copper, aluminium, and steel, lithium and cobalt come from a far different place in terms of pricing. Both lithium and cobalt have been seen in the past as "minor metals" and do not have high transparency and liquidity around pricing. Lithium contract prices can be as much as 60 percent below spot price inside of China. The spot price is sued predominately in China for speculation rather than large-scale negotiations, and it is rarely used for hedging as with most of the "major" metals. While cobalt trades on the LME, the contract is very illquid, averaging open interests of just 354 contracts since the beginning of 2016. This pales in comparison to copper, which has an average of 331,000 contracts

Value-added opportunities

Australia is already the world's largest lithium producer, accounting for about 60 percent of production with several new hard rock lithium mines and processing facilities under development. During 2017, it was also the top destination for lithium exploration with 26 percent of exploration spending globally.

Current production comes from the world's largest lithium mine, Tianqi Lithium/Albermarle's Greenbushes; Galaxy Resources' Mt Cattlin; Mineral Resources/Jianxi Ganfeng Lithium's Mt Marion, and Tawana Resources/AMAL's Bald Hill, all in WA. Two more have came online this year, Pilgangoora projects being developed by Altura Mining and Pilbara Minerals.

Currently these projects are, or will, produce spodumene concentrate, before being shipped to offshore refineries - the first stage of the lithium processing chain.

In its February report, the Association of Mining and Exploration Companies (AMEC) said there were substantial value-adding opportunities along the transformation chain, from mineral extraction to end-production lithium, calling for further downstream processing and refinement of concentrates before export.

Chinese are also exploring to build a lithium refinery in Muluku Indonesia, while a Zimbabwean miner is looking to upgrade a Nickel refinery to produce batter-grade lithium.

"While a current hub location is effectively emerging in Kwinana, it is interesting to explore other possible locations," - AMEC

The integrated supply chain

A convergence of events has brought about the viability of a large-scale integrated supply chain. To keep up with slimming margins, increasing competition, and a decreasing amount of differentiation between battery manufacturers, an integrated supply chain model works well in this case.

Supply chain integration is a large-scale business strategy that brings as many links of the chain as possible into a closer working relationship with each other. The goal is to improve response time, production time, reduce costs and waste and remove market and pricing risks. Every link in the chain benefits. An integration may be done tightly through a merger with another firm in the supply chain, or loosely through sharing information and working more exclusively with particular suppliers and customers. In the latter case, the supply chain isn’t truly “owned” by one company, but the various links operate almost as if one company to increase efficiency and benefit everyone through steady, reliable business.

Vertical integration

Vertical integration refers to any moves that include different levels of the chain. It could involve merging or buying out a link ahead of or before your organization, or possibly developing your own capabilities for handling the entire supply chain, front to back. For example, if the Battery manufacturer purchased a mining project development firm, they would control more levels of their supply chain - the major parts and the product. This type of acquisition could gain the firm greater control over their profit margins and costs, net them a larger share of profits, reduce waste and time spent in production.

The various players in the Lithium supply chain and their level of investment

Reasons for the call for vertical integration;

  • Demand growth will be great and place significant strain on the lithium (and cobalt) supply chain in the long-term
  • Vertical integration improves response time, confirms project margins and greater controls cost, which benefit explorers, producers, refiners and cathode and cell manufacturers across the entire "chain".
  • Vertical integration is scalable either horizontally or vertically, adding other stakeholders in the "chain", reducing bottlenecks such as coming together to resolve issues in battery-grade materials and battery components (cathode material).
  • Li-ion technologies are unlikely to be substituted in highest growth areas (Automotives) and there is little scope to reduce lithium intensity of use in batteries
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