Critical Minerals driving Modern Economy?

Critical minerals have emerged as drivers of any modern economy and India has ensured the country taps into this global opportunity through the launch of the National Critical Mineral Mission.

Union Budget of India 2024-25 has proposed launching Critical Mineral Mission for domestic production, recycling of critical minerals, and overseas acquisition of critical mineral assets. Its mandate will include technology development, skilled workforce, extended producer responsibility framework, and a suitable financing mechanism.

Addressing the national seminar on challenges and opportunities in the mines and minerals sector, Indian Union Minister of Mines Mr. Reddy said that the government has brought about a paradigm change in the minerals sector, making it transparent and competitive.

Critical minerals, such as cobalt, copper, lithium, nickel and rare earths, play a crucial role in the production of clean energy technologies, from wind turbines to electric cars.

Much like the poignant parable of Gautam Buddha teaches us the importance of focused effort over scattered attempts, we must apply the same principles for the exploration and processing of critical minerals.

The battery cells is once such technology –- versatile energy storage units that enhance sustainability, reliability, and flexibility across various applications. Their continued development and adoption contribute to a cleaner and more efficient energy landscape. Battery cells help integrate intermittent renewable energy sources (like solar and wind) into the grid. They smooth out fluctuations by storing excess energy and releasing it when needed, reducing reliance on fossil fuels.

The battery value chain will continue to expand as EV and Energy Storage Systems (ESS) adoption and the energy transition accelerate. Mineral-rich countries have a key role in enabling the transition. And they also stand to benefit tremendously if they can determine the right mix of policies to convert mineral demand into sustainable economic growth. 

Despite recent headwinds, the mining, processing, and battery market is expected to grow more than 3x to reach over $1 trillion by 2040. Softening EV demand has trickled down to the battery industry. New entrants to battery manufacturing and precursor (pCAM) and cathode active material (CAM) have additionally been hit by high interest rates and fierce competition.

Mining and processing are likely to be the most diversified stage of value chains over the next two decades, while downstream industries will remain concentrated, with China poised to keep control of more than 50% of processing and 60% of pCAM/CAM/cell capacity.

Despite evolving policies, regions’ market share for mining, taking an average across cobalt, lithium, natural graphite, nickel, and manganese, is expected to remain relatively stable over the next decades. By 2040, Africa is projected to hold an estimated average of 36% of mined production across all five minerals, slightly up from 32% in 2024. The remainder of the mined supply will be spread across different jurisdictions including China, the rest of Asia, South America, and Oceania.

A looming over-supply in the lithium market is undisputed. The price boom in 2022 and 2023 attracted significant investments in the lithium industry and created strong growth in the supply of lithium chemicals. However, the growth rate in lithium is showing signs of slowing down which will undoubtedly result in an over-supply starting in 2024 and continuing for the rest of the decade.

The question is, what are the best actions to navigate this nascent industry?

In a surplus market, the buyers of lithium products will most likely reduce their working inventories to allow for something closer to ‘just-in-time’ procurement. In contrast, the producers of lithium products will likely increase their working inventories as they will need to hold the stock until the buyers are ready for it. 

From January 2021, we have seen EV sales increase 2.4 times to January 2024, with a steady and continued increase, albeit with some seasonality. During this short period, we see lithium carbonate prices shoot up and decline after a short period of stability. Fast forward to January 2024, and lithium carbonate prices have grown less since January 2021 than EV sales. This could indicate that the industry is returning to some level of normality.

Undoubtedly, demand for lithium will continue to be strong in the coming years as the world continues to decarbonise. It is also no secret that while demand continues to grow, the rates will be lower than the extraordinary rates seen in some periods in the last few years.

The market balance in the coming years will be primarily determined by supply. The incredible prices seen in 2022 spurred many investments into lithium chemical capacity, and we expect much of this capacity to enter the market in 2024 and 2025. During these two crucial years, we are currently forecasting an additional 873 kt LCE to be added to supply. This growth exceeds the entire lithium market size in 2022. Of this additional production, 69% will be from Chinese-based assets, including 39 new refinery assets in China alone.

While we focus on the decrease needed near-term in the supply of lithium chemicals, there are two aspects we need to keep in mind:

Companies with very low-cost assets on the cost curve could continue to expand and make a profit in the process. An expansion of low-cost assets could lead to lower prices, putting other assets at risk of becoming margin negative.

At the end of the current decade, the lithium industry is forecast to enter another supply deficit. Continued growth in demand and a slowdown in supply growth will lead to this. Any assets put on care and maintenance during the current surplus period will be needed longer-term.

The lithium industry must find economically viable resources, go through the process of firming up the resources and reserves, obtain permits, go through the stages of feasibility studies and finally obtain financing to build the asset.

These challenges will, without doubt, create micro-cycles where supply and demand are misaligned. These periods will create a level of confusion and uncertainty, but it is crucial to remember that the decarbonisation efforts are global, ongoing and intensifying, which creates a solid foundation for lithium. 

Over the last year, the price for lithium iron phosphate, or LFP, battery cells in China has dropped 51% to an average of $53 per kilowatt-hour. The average global price of these batteries last year was $95/kWh.

This has led to a jump in China’s new-energy storage capacity, a segment dominated by lithium-ion batteries, to 44 gigawatts at the end of June, a 40% increase from the start of the year, according to National Energy Administration data. That’s already surpassed the nation’s 2025 target and helped fuel a global boom, with energy storage overtaking electric vehicles last year as the fastest growing market for batteries.