Lithium Languishes Despite Driving EV Sales
We live in an age of technological revolutions. The most noticeable ones we experience on a day-to-day basis are in the IT space. Less visible yet very fast-moving advances are underway in solar energy and lithium-ion battery storage. While these technologies may not be progressing as fast as computing power, where the dollar cost of computing often falls by about 40% per year, solar energy and lithium-ion battery storage costs have been coming down at a pace of about 12-13% per year, on average, for the past few decades.
In 2009, the total installed cost of utility-scale solar generation including battery storage was $5.54 dollars per kilowatt hour. By 2023, that had dropped to $0.68 (Figure 1), and initial data suggests that those costs may have fallen an additional 20% in 2024. Overall, that’s close to a 90% decline in the cost of solar energy generation and storage in 15 years – or about a 13% decline per year. According to the International Renewable Energy Agency, the cost of wind energy came down at a similar pace of 48% for offshore and 56% for onshore operations between 2010 and 2020,1 and may have dropped by an additional 13-15% in 2021.2
Figure 1: Solar energy costs have been falling by 12-13% per annum on average
Updated from 2021-2023 with Statistica, "Average Installed cost for solar photovoltaics worldwide."
The problem with solar and wind energy has always been their intermittent nature. When the sun doesn’t shine and the wind doesn’t blow, there’s no energy generation. As such, storage has always been key and up until recently prohibitively expensive. However, advances in battery technology have resulted in sharp declines in costs in past decades. The cost of storing a kilowatt hour in a lithium-ion battery has fallen by nearly 99% since 1991. Here too, costs have fallen by an average of 13% annually (Figure 2).
Figure 2: Lithium battery storage costs have fallen by nearly 99% since 1991
The automotive sector has also been experiencing rapid changes as well, as electric vehicle (EV) sales grow steadily worldwide. In the U.S., EV sales hit 11.4% of all vehicle sales in 2024, up from essentially zero in 2010. In China, EV sales hit 35% of vehicles sold in 2023 and over 50% in 2024. And, of course, lithium-ion batteries help to power smart phones, of which there were 7.2 billion worldwide by 2024.
Given the rapid decline in costs and the scale of increasing demand for lithium-ion batteries, one might imagine that lithium prices would be sky high. Instead, lithium prices are near record lows (Figure 3). Moreover, the lithium hydroxide futures curve is relatively flat compared to the recent scale of the price decline (Figure 4), suggesting that traders are not expecting a rapid rebound in prices over the coming 12-18 months.
Figure 3: Lithium hydroxide prices are down by over 85% from their highs
Figure 4: The lithium hydroxide forward curve is in a shallow contango.
The bear market in lithium prices has not, however, dampened enthusiasm for hedging financial exposure to the metal. Both average daily trading volume and open interest have risen sharply (Figure 5).
Figure 5: Lithium hydroxide open interest continues to soar
The one factor that explains both the sharply rising trading activity in conjunction with the exceptionally low prices is supply. Global mining supply of lithium is burgeoning, rising by an estimated 25% in 2024 alone. Since 1994, global lithium output has risen by 3,600% or by about 20% per year compounded (Figure 6).
Figure 6: Lithium mining output has risen by 3600% since 1991.
While the adage in markets is that the cure for low prices is low prices, it remains to be seen if lithium output will slow significantly as a result of depressed prices. Some private sector estimates suggest that lithium supply might be on track to grow an additional 15% in 2025, perhaps explaining why the forward curve remains relatively flat given the scale of the 2022-24 price decline. Eventually, if and when supply growth slows to below the level of demand growth, we could see a significant rally in lithium prices.
Indeed, the demand outlook depends both on the pace of technological change and adoption. If the political winds shift against EVs, solar and wind, this might delay the date at which we see a strong rebound in prices. Watching what happens to EV sales in the U.S., Europe and China will be key to understanding the strength of global demand. Another key question that remains unanswered is at what point do solar, wind and EVs become competitive with natural gas, gasoline and combustion engine cars without subsidies? Once that point is reached, demand for lithium and other battery metals could grow strongly irrespective of public policy changes.
References
Trading lithium
The rapid growth of electric vehicles and large-scale battery storage applications for electronic devices is increasing lithium demand as well as price risk.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
