By Andy Home

LONDON, June 3 (Reuters) - It's a tough time to be a lithium producer as the light metal sinks under the weight of excess supply.

Lithium hydroxide prices LTHc1 have collapsed by 90% from their 2022 peak and show no signs of recovery.

Multiple producers are now operating at zero or negative margins, according to consultancy Wood Mackenzie. Even giants like Albemarle ALB.N, the world's largest producer of the battery metal, have been cutting costs and deferring new projects to weather the supply storm.

Rio Tinto RIO.L, however, is undaunted. The global mining house remains "consistent in its belief in the long-term outlook for lithium".

The company is putting its money where its mouth is, snapping up U.S.-based producer Arcadium for $6.7 billion and partnering with Chilean state entities on two projects.

It's a big call, given the current despondency in the market, but Rio believes demand will be strong enough both to absorb the current excess and pull the market into deficit around the turn of the decade.

It's a bet that lithium will remain the dominant battery metal in a fast-changing landscape.

LOW PRICE, HIGH DEMAND

The weakness in the lithium price results from too much new supply hitting the market at the same time.

Global lithium production grew by over 35% year-on-year in 2024, according to the International Energy Agency $(IEA)$. New mines are still ramping up and Chinese players show little appetite for cutting production.

The supply tsunami, however, masks the strength of lithium demand. The IEA estimates global usage grew by 30% last year, the increase being equivalent to the size of the entire global market in 2018.

The electric vehicle $(EV)$ sector, the biggest user of lithium-ion batteries, is in robust health. Sales of new energy vehicles rose by 25% last year and were up by 29% in the first quarter of this year, according to consultancy Rho Motion.

Lithium use in energy storage systems is growing even faster as global power systems pivot towards cleaner but intermittent energy sources such as solar and wind.

Rio Tinto said it expects demand to grow at a compound annual rate of over 10% through 2040.

DOMINANT METAL

The main threat to that scenario would be a shift in battery chemistry as manufacturers compete to produce ever cheaper, more efficient batteries.

There has already been a big shift away from more expensive battery metals such as cobalt and nickel but to date lithium has maintained its status as the dominant ingredient in the chemistry mix.

The amount of nickel and cobalt deployed in new energy vehicles was up by just 12% and 2% year-on-year respectively in March, according to Adamas Intelligence. But lithium deployment was up by 30%, matching the overall EV sales growth rate.

The battery materials battle, however, is far from over.

Chinese giant CATL 300750.SZ has been pioneering the development of sodium-ion batteries. The latest iteration, Naxtra, will almost match in efficiency the lithium iron phosphate (LFP) batteries that are displacing nickel-manganese-cobalt $(NCM.AU)$ chemistries.

CATL's billionaire founder Robin Zeng sees sodium-ion batteries potentially replacing up to half the market for LFP batteries.

The IEA is less sure, noting that sodium-ion batteries are most competitive in a high lithium price environment, which the current one is certainly not.

Lithium's low price may be its best defence in fighting off challenges from other materials.

It is also causing battery prices to fall, making new energy vehicles cheaper.

MARKET ACCELERATOR

Average battery pack prices fell by 20% to a record low of $115 per kilowatt-hour in 2024, the largest annual drop since 2017, according to the IEA.

The share of cathode raw materials in the battery pack price fell to 10% in 2024 from over 20% in 2023 thanks to bombed-out prices across the battery metals spectrum.

The shift to LFP batteries in the Chinese market has also played a significant role in reducing costs since they are 30% cheaper than the NCM batteries popular in Western markets.

European auto companies have taken note. Volkswagen VOWG.DE is adopting LFP technology as it aims for a 20,000-euro entry-level electric car for the European market.

Price has been one of the major deterrents for consumers to go electric but the gap with conventional vehicles is narrowing.

In terms of EV sales, market forces are a powerful offset to the headwinds from tariffs and U.S. President Donald Trump's scrapping of his predecessor's green energy agenda.

SAFE BET

Lithium's battery metal crown looks safe for now.

Even assuming sodium-ion batteries start taking market share in China, the impact on lithium will be mitigated by an acceleration in the global EV revolution and growing demand for grid storage solutions.

Moreover, the IEA points out that despite the interest in novel chemistries, the primary driver of battery innovation remains existing, conventional chemistries based on lithium. Incremental improvements are being made all the time both to NCM and LFP technologies.

Lithium demand is already growing phenomenally fast and every indication suggests it will continue to do so in the next few years.

But how long before demand strength translates into a market deficit and higher prices will depend on how long the current supply surge lasts.

Don't hold your breath. It could take a while.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Alexandra Hudson)

((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))