SQM’s new CEO on lithium, EVs, and future of batteries

After commercialising a new lithium extraction method from sub-surface brines in the Atacama Desert, SQM not only become the world’s largest supplier, but also one of Chile’s most important and strategic mining companies.

Through its production of lithium, potash, iodine and nitrates in the country’s north, SQM enjoyed a renaissance in demand for many of these minerals, and the higher prices that came with it in the mid-2000s.

The price of potash fertiliser increased ten-fold on the back of a global resurgence in demand, especially from China, while iodine’s price spiked after Japan’s Fukushima Disaster owing to its use in radiation emergencies.

But it was lithium’s rise to dominance in smartphones powered by lithium-ion batteries that saw SQM thrust into the global spotlight as one of very few suppliers of the strategic raw material.

“The demand for lithium in energy storage had indeed been a spectacular development between 2004 and 2009,” Patricio de Solminihac, chief operating officer of SQM explained in an exclusive interview with Benchmark Mineral Intelligence.

“The boom of mobile phones, laptop computers and other portable devices [saw lithium demand surge], and during the [last five years], the successful introduction of smartphones and tablets has further boosted lithium demand.”

It was in 2004 when the lithium industry started to see a supply squeeze translate into higher prices, particularly for lithium carbonate, the precursor material used in battery cathodes. The increased demand from this new market caused friction with traditional markets such as ceramics and glass that were competing for the same raw material, which led to price volatility.

Shipments of lithium-ion batteries rose from 650m in 2003 to over 3,000m in 2009, a trend which caught lithium producers by surprise creating a shortage of material in the market. The major suppliers, however, soon caught up to meet the increasing battery demand which stood at 4,500m cells in 2014.

The industry is now preparing for the next phase of development for lithium-ion batteries with electric vehicles (EVs) looking increasingly promising to the outsider.

Batteries 2.0: preparing for the EV phase

Significant new supply of batteries is scheduled for 2017 onwards with Tesla Motors, LG Chem and Foxconn Technology Group all planning lithium-ion megafactories. This is in addition to new plants and expansions by battery majors such as Samsung SDI (p38).

The influx of new players and new production has changed the EV outlook for many from a conservative to a bullish standpoint as lower cost cells could translate to cheaper vehicles and increased uptake.SQM’s

“We see the development of EVs with much more caution,” explained de Solminihac.

“There are important variables that will impact EV development, positively or negatively. These are: infrastructure availability, range, battery costs and government policies, all of which have difficult challenges to overcome.”

“But there is another variable that may have an even stronger negative impact on the development of EVs: the oil price.”

The price of oil has tumbled since Q4 2014 to lows in Q1 2015 of under $50/bbl, reducing the cost of petrol at the pump and giving the consumer and governments economic breathing space on alternative technologies and lower carbon emitting energy sources.

“I believe that the oil price and its short- and medium-term trend will definitely have an impact on the demand growth for EVs. This situation will delay or reshape some of the larger projects in the pipeline,” de Solminihac said.

Not only could EV uptake be impacted by the low oil price, but solar and wind power are also in the economic firing line.

These industries have benefitted in recent years from high oil prices and have subsequently seen significant sums of investment flow into the market.

For example, China installed more solar panels in 2014 than the US has in its entire history and in the last three years, the country has increased its solar installations ten-fold to 33 GW. There is no doubt other factors were at play, but the high price of oil laid the economic groundwork for such huge projects which have also been eyed as a new market for larger scale, stationary storage batteries.

This also brings into focus the cost of batteries which stands at an average of $250/kWh today. Tesla’s Gigafactory is targeting a significant reduction in this cost to $100/kWh by 2020 when its super-plant is expected to hit capacity and achieve the necessary economies of scale.

“The cost of batteries will go down over time, no doubt about it, but to expect that this reduction will compensate the oil price drop seems unrealistic to me,” the SQM operating chief explained.

The discussion over the use of batteries in the utility industry has also been increasing in recent years, particularly in the US, as challenges with an aging national grid system mount with an ever growing population.

Lithium-ion has become the technology of choice in this market primarily owing to the availability of supply. Other batteries such as vanadium-flow have long been touted as an ideal technology for stationary storage but have yet to see significant traction in a market that is embryonic in stage.

SQM expects increased competition in this arena.

“Since there are no restrictions in the size and weight of types of batteries, as you have with those used in portable devices and EVs, we see other technologies competing with lithium in stationary storage applications,” said de Solminihac.

Reacting to new demand

Growth in the battery sector and continuing, steady demand in staple markets such as glass, ceramics and industrial grease has onlookers questioning whether lithium supply from the Atacama can meet new demand or if there is room for new entrants.

Benchmark put this scenario to SQM’s COO.

“SQM has environmental permits in place to extract, if required, up to three times the annual quantities of lithium that are extracted today,” said Patricio de Solminihac.

“Our current production capacity is enough to supply the needs of our customers in the short term. But we have a reaction time of less than 12 months to increase production [to meet new demand].”

Since the influx of lithium exploration companies between 2009 and 2011 following a surge in the price of lithium carbonate, new producers on the market have been limited.

“We were expecting two new players to enter the lithium market this year: RB Energy, with its Quebec Lithium Project, and Orocobre Ltd, with a brine operation in Argentina,” he explained.

“RB Energy filed for Creditor Protection in October 2014 and suspended the project indefinitely. It is unclear when or if the project will come back on stream. Orocobre has just inaugurated its plant and should start supplying some quantities in Q2 2015.”

“Considering the present demand situation, we believe that new production from Orocobre will absorb a good part of this growth and Chile’s position will remain similar.”

SQM, the same as its competitor in the Atacama, Rockwood Lithium, produces lithium in Chile to a production quota set by the government.

While both of the two companies are the world’s most dominant suppliers from brine, both companies have let market share decline by not significantly increasing output in favour of stabilising prices in the market. This however has also given a small window of opportunity for companies like Orocobre to enter the lithium market and fill the new demand.

The Chilean government sets the extraction quotas for its producers and is presently reviewing the situation.

“Last year, President Michelle Bachelet established a National Lithium Commission… tasked to evaluate the future of lithium mining in Chile, including improving the current mining concession system to increase exploration and mining of lithium, and to recommend a new state policy for the exploitation of lithium and development of new lithium products,” de Solminihac said in the interview.

“The Commission is supposed to submit its recommendation very soon. However, some preliminary information anticipates that the status quo on the strategic situation for lithium will prevail,” he said.

Lithium prices: Hydroxide rising

This brings us to the question of prices.

For many years lithium carbonate has been the product of focus, even though its hydroxide counterpart is also used in batteries.

This neglect, it appears, is starting to have an impact on the price of lithium hydroxide in SQM’s eyes.

“In the case of lithium hydroxide, increasing demand for batteries and the fact that there is no relevant new capacity foreseen in the short term is certainly putting some upwards pressure on prices,” de Solminihac explained.

“Although there is room for a production increase in China, I believe that this upwards trend will continue during 2015 and 2016, increasing the premium between lithium hydroxide and lithium carbonate.

“We are also seeing upwards pressure on prices in lithium carbonate, especially in the battery market in Asia that was enjoying lower prices than the rest of the world. This trend will continue during H1 2015, or until Orocobre starts delivering quantities.”

The price of battery-grade lithium carbonate has averaged between $5,500 and $7,000/tonne over the last few years, while hydroxide has fetched at least a 20% premium on this.

The added pressure of increased battery demand in a product stream that has seen little extra capacity could, Benchmark believes, lead to significant price increases in 2015 in what remains an inelastic market.

The recent changes in supply and the very strong existing demand dynamics, which sees average battery growth rates at 8% a year, means lithium is one of most eagerly watched of all critical mineral and metals industries.

And while 2015 is set to be a static year for many, lithium is already seeing new producers, increased demand and price volatility.

This year will be one to watch.

Interview was taken from Benchmark Mineral Intelligence’s inaugural magazine, sold as part of Benchmark Membership. The first issue is free. Download here: www.benchmarkminerals.com/subscribe