The electric vehicle (EV) revolution is ushering in a golden age for battery raw materials, best reflected by a dramatic increase in price for two key battery commodities – lithium and cobalt – over the past 24 months. In addition, the growing need for energy storage, e-bikes, electrification of tools, and other battery-intense applications is further increasing the interest in these commodities. However, the recent concerns regarding the future of the raw material supply availability for batteries and the impact of rising commodity prices on battery production costs have highlighted risks that may create divergent futures for these two commodities. The strategic response needed will likely differ across industry players such as automotive OEMs, battery manufacturers, mining and refining companies, and financial investors; for all players, there is a growing imperative to understand the complexities and dynamics of this rapidly changing market and to ensure that their strategies are robust in the face of future uncertainties.

Both the lithium and cobalt markets have historically been driven by battery demand – primarily from consumer electronics – representing 40 percent and 25 percent of demand respectively in 2017. However, the growing adoption of Vs and need for EV batteries with higher energy densities will see the demand for lithium increase more than threefold from 214 kt to 669 kt LCE between 2017 and 2025, whereas cobalt will increase by 60 percent from 136 kt to 222 kt over the same period in McKinsey’s base case outlook. This forecast assumes that Li ion battery technologies will be the prevalent battery technology for the foreseeable future.

Recent price spikes for lithium and cobalt have raised concerns regarding the long-term supply availability of these commodities and highlighted the very different supply-side dynamics for both. Over 95 percent of the world’s lithium supply occurs as a primary product in the form of brines or hard rock ores, with a global production footprint including Latin America, Australia, and China. Conversely, less than 10 percent of cobalt supply occurs as a primary product, with the remainder produced as a by-product of primarily copper and nickel mines and over 65 percent of global production concentrated in the Democratic Republic of Congo (DRC). These price spikes have seen a swathe of expansion announcements for lithium over the next several years, suggesting ample capacity to meet the growth in demand to 669 kt LCE by 2025. However, there is much more concern for cobalt given the lack of transparency in the value chain and DRC country risk.

How and if these commodities diverge will depend on several factors, the most significant being the speed of EV adoption and the shift in EV battery chemistries across geographies. Whatever future emerges, industry players will need to base their strategic responses on a sound understanding of the future supply and demand dynamics, battery technology evolution, pricing, and risk management mechanisms.

The following base case analysis is based on a set of assumptions regarding the global EV demand growth and battery chemistries the industry will adopt. Although we believe these assumptions to have a high likelihood of occurring, how the industry evolves will be affected by government policies (especially in the DC), battery technology innovations, and industry economics. Any major changes in these areas may result in vastly different outlook from what is presented here.

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