The question becomes more insistent as the magic formulas appear to get out of stagnation thanks to an element. Are we saved with lithium? To the extent that there is a kind of “gold rush” with this natural resource, it is worth reviewing the determinants of its long-term price a bit.. Precisely, escaping from the situation, among other things, because predicting the price of a commodity in the short term is quite a risky task, given the different underlying processes that determine it. On the other hand, for the purposes of business investment planning and country development, it is a key task to find trends in the more structural factors that determine its value. What is seen in lithium?
Ups and downs. From the last quarter of 2020 to November 2022, lithium values increased more than 15 times, in a jump hard to find in other commodities. But perhaps what is most interesting is that in the last four months, the price lost about half of what it had gained in that explosive span. What’s going on? In this volatility there are short-term phenomena, but long-term trends are already beginning to play that should be reviewed.
At the heart of lithium demand is the transition from internal combustion vehicles to electric drive. How is this phenomenon taking place? We can locate the year 2017 as the peak of annual sales of traditional vehicles, with a total of around 86 million units sold worldwide, to which another million electric vehicles were added. Since then, sales have been falling hand in hand with the growth of electric vehicles. D.uring 2022, 69.5 million units of internal combustion vehicles were sold, but already almost 11 million electric vehicles, increasing “barely” 4 million over sales in 2021. If the substitution trend were stable, we would have several years of sustained growth driven by this substitution process. Once it has been exhausted, the increase in demand for batteries will be mainly driven by the replacement of batteries that are going to run out.
Why, with demand growing so solidly, have prices been collapsing? According to Bloomberg, among the many short-term factors, during 2022 there was a weaker increase in sales growth (especially in the Chinese market), appeasing price expectations. But this would be insufficient to explain the variation, and it is necessary to take into account supply considerations.
On the supply side, while countries like Chile or Argentina are establishing themselves as dominant suppliers, investments in Africa are growing. To understand the long-term trend, it is necessary to estimate the rates of increase in demand and supply. According to Goldman Sachs, until 2025, the supply will grow 34% annually, while the demand will grow 25%, anticipating that the downward pressures would continue for a few years.
lessons. Can we anticipate that lithium has hit its ceiling? No, since it may well happen that electric cars accelerate their process of replacing internal combustion vehicles or that ongoing lithium projects have problems in the first years of operation. But we can also imagine more downward trends, as a result of improvements in substitute technologies such as hydrogen, or innovations in other battery materials, such as graphene..
However, these changes in recent months leave us some lessons, especially for the country’s growth and to put into perspective an excessive optimism about its impact on national development and a certain recurrence of thinking that we are saved, this time with lithium, as if it were a magical or automatic process.
The first lesson is that natural resources are not eternal opportunities, but must be seized at the moment they present themselves. We are talking about windows that countries with this natural resource can take advantage of a lot, a little, or let go.
The second is that, even in a commodity as “hot” as lithium, its prices will have huge swings. Therefore, it would be grossly irresponsible to estimate tax revenues by projecting only the maximum prices instead of taking the bounded averages..
The third lesson is to understand that if we want to be a large-scale supplier of raw materials, we must be enormously efficient in our supply chains. When prices crash, the first trades to close are the most inefficient. For this reason, even though we have enormous natural productivities in many sectors, we cannot ignore the logistics efficiency agenda.
Finally, to the extent that primary products continue to be an essential source of national income, it is necessary to build countercyclical funds. This is a major challenge in a country where the political leadership is highly prone to raffling off the long term in order to save an election.
For a fund of this type to be credible (such as those established in Chile for copper or in Norway with income from oil exploitation, for example), the establishment of very restrictive institutional mechanisms is required..
Lithium is a formidable opportunity for Argentina and several countries in the region. But taking advantage of it properly will simultaneously require serious and coordinated work between sectors and the state.. A type of work that we have to learn to do.
# Roberto Vassolo is a professor of Economics and researcher at the IAE Business School.
by Roberto Vassolo
