Jon Hykawy examines the case for the celebrated metal and its overlooked partner
by Greg Klein
Even with his own “conservative” forecasts, Jon Hykawy sees a strong case for lithium. But li-ion batteries call for other commodities too, and cobalt stands out as a critical material facing uncertain supply. Hykawy, president of the consulting firm Stormcrow Capital, sees markets through a number of perspectives. That comes from being a 14-year Bay Street veteran, a physicist who conducted post-doctoral work in nuclear power, and a research scientist who’s scrutinized the world of rechargeable batteries and fuel cells, as well as wind and solar energy.
Hykawy claims a middle ground between lithium’s boosters and detractors. “We see lithium demand kind of doubling by about 2025 from current levels,” he says. “But prices are going to correct from their current levels.”
He cites Q1 prices outside China in the range of $11,000 a tonne for lithium carbonate and about $14,000 for lithium hydroxide. “If you look inside China, however, you can find spot prices over $20,000 a tonne.”
With historic levels closer to $5,000, “I don’t think there’s any question prices are overdone right now.” Hykawy expects a decline to about $7,000 or $8,000 a tonne until 2018. “Then you’ll see a gradual but steady increase in pricing. And that leaves a lot of room for companies to make a lot of money because the cost of producing lithium is way below that.”
Nor does lithium strongly affect battery prices, whose steady decline has been crucial to the electrification boom. With a Chevy Volt battery, for example, lithium probably contributes less than 5% of the total cost, he says.
Projections of long-term market strength notwithstanding, he maintains that the planet has lithium to spare. “We’ll never have a fundamental shortage. But the market does require some juniors to come into the space.”
But what are chances of an entirely new battery technology taking over? None in the foreseeable future, according to Hykawy.
“The lithium battery was developed in the late ’70s, it really became ubiquitous in the ’90s, and now you’re seeing the fruit of four decades of research. Any replacement would have to go through the same degree of scrutiny. They have to be confident that battery is safe, especially, especially if they plan to sell that device in the United States, the land of the lawyer and the home of the litigious.”
Additionally, li-ion has “such a lengthy head start, such advantages in scale and cost, that newcomers couldn’t compete in price.”
Looking at graphite, he expects rising demand from batteries “but nothing particularly wondrous. It really comes down to a cheap supply, and likely the cheapest supply is going to come out of China. There are juniors trying to bring alternate sources to the market, but they’ll have to compete with Chinese pricing.”
Then there’s cobalt.
“It’s a very important part of the battery, it helps increase the amount of energy the battery can contain,” Hykawy points out. “The problem is, even with my conservative growth figures for battery use, by 2025 all the cobalt mined in the world today would be required for the battery industry. There wouldn’t be anything left for steel.”
He says battery and steel manufacturing each take up roughly half of current supply.
Most cobalt comes as a byproduct of nickel and copper mining. “But when the price of cobalt hasn’t really moved, which it hasn’t, and the price of nickel and copper aren’t doing well, then you’ve got projects that are shutting down.”
Problematic too is the source of so much supply. The U.S. Geological Survey attributes nearly 51% of last year’s mined cobalt to the Democratic Republic of Congo. A disturbingly unstable country fraught with armed combat, it’s also a notorious purveyor of conflict minerals. In January Amnesty International revealed children as young as seven suffer very harsh conditions to produce cobalt that might find its way to major manufacturers.
As for the DRC’s legit mines, they haven’t gone unnoticed by the Middle Kingdom. Last month China Molybdenum signed a $2.65-billion definitive agreement to buy out Freeport-McMoRan’s (NYSE:FCX) 56% stake in the DRC’s Tenke Fungurume mine, the country’s largest source of copper and “the world’s premier cobalt producer,” according to Freeport.
China Moly also has negotiations underway to take over Freeport’s interests in a copper-cobalt exploration project near Tenke, as well as a cobalt refinery in Finland and a related global sales and marketing business.
“We should view this as a warning, as an indication that there’s more to batteries than just lithium,” says Hykawy. “If we’re going to be serious players in this space, either from the strategic point of view of nations, or from the point of view of companies, we’ve got to think about the entire supply chain. It’s not enough to worry about a headline material like lithium and bypass all the other stuff.”
Yet lithium remains a “critical material in batteries, and will probably continue so for decades at least,” he says. “But investors should understand there’s a lot of lithium out there. The market’s going to become more robust over time, you’re going to have more buyers competing for whatever material is available. That’ll be good for prices, as long as no one does anything stupid like bringing excess supply onto the market.”