Lithium Price versus Reality

Lithium, now priced at over US$80,000 per tonne, has increased in value by a factor of 5 since 2020. One might be tempted to presume that the cost of electric vehicles would be expected to exhibit a parallel price trajectory, but such is not the case.

The main reason we haven’t seen that phenomenon is that battery manufacturers purchase lithium via offtake contracts where a price is negotiated for the life of the contract. Typically these contracts will be for at least one year but, in some cases, may go out further.

Companies are reluctant to commit to longer-term contracts for fear of missing out on any big price moves.

The futures price as quoted on various commodities futures platforms, has nothing to do with the actual delivery and availability of lithium products to battery manufacturers and everything to do with the structural defect in the futures complex that permits speculation on a commodity – essentially, betting – without the need to own the commodity to place a bet or fulfill a contract at expiry.

This defect is also why the commodity futures price of any given commodity does not in and of itself affect the real world price paid by industrial consumers of such commodities. Speculators in the futures market originate contracts for future purchases and sales of lithium that they will never have to settle in actual lithium. Lithium is merely the reference commodity for a speculative synthetic asset whose profitability is determined by the futures price – not the price being paid in the real world.

That being said, the futures market, as a poorly regulated virtual casino using real world commodities as its poker chips, has spillover pricing effects on real world contracts over time. This distortion is the unfortunate byproduct that causes consumers to absorb the losses of speculators through price inflation…but that’s a rabbit hole we shan’t venture down any further here.

So how much are battery manufacturers actually paying for lithium carbonate and hydroxide, the two most common battery lithium ingredients?

Jonathan Evans, CEO of Lithium Americas Corp (TSE:LACNYSE:LAC), said during a recent interview that:

“contracts – and a lot of the contracts are changing – the levels I think you’re going to see when public companies start to report are in the $20,000 to $30,000 range.”

To give you an idea of how fast lithium prices are moving in the futures market, Joe Lowry, CEO of Global Lithium LLC, a lithium industry consultancy, said back in February that:

“lithium prices could go to $70,000 a tonne” and “there is no reason they couldn’t”.

He also cautioned that:

“the EV revolution isn’t going to be stopped by the price of lithium; it’s going to be delayed by the lack of lithium.”

Lithium production companies are experiencing exponential price increases among those perceived to be relatively close to the onset of production. The extreme price trajectory has investors wondering how high both the price of lithium and the price of lithium juniors might go?

I expect that we could see triple-digit lithium prices even among juniors, and the price of lithium looks like it could easily blow through $100,000 per tonne based purely on technicals.

Don’t forget: this isn’t like oil, where supply can be modulated upward or downward at will by a cartel of giant producers. And it’s going to take a long time for the supply side to catch up to the demand implied by the electrification of the global automotive fleet.

The risk that gains on lithium pricing by the day is the incentive to fast-track new non-lithium battery chemistries by alternative battery technology purveyors.

Several contenders seem to be sprinting along at light speed. And there’s no denying that the prototype cycle to commercial product is shorter than ever before, thanks to technology. But it looks like this lithium bull market has at least two to three more years of this current momentum, if not more.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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