The Lithium Battery Innovation Bomb

In 1968, biologist and popular author Paul Ehrlich published The Population Bomb, an alarmist book hectoring the world to curb its population growth or suffer environmental and economic degradation.

Aptly, Ehrlich started the book off with a bang:

‘The battle to feed all of humanity is over. In the 1970s and 1980s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate, although many lives could be saved through dramatic programs to “stretch” the carrying capacity of the earth by increasing food production and providing for more equitable distribution of whatever food is available. But these programs will only provide a stay of execution unless they are accompanied by determined and successful efforts at population control. Population control is the conscious regulation of the numbers of human beings to meet the needs not just of individual families, but of society as a whole.’

The book didn’t just set off population anxieties. It set off a famous academic bet between Ehrlich and economist Julian Simon.

Simon was less alarmed by Ehrlich’s prediction than its reasoning. The economist was optimistic. He did not envisage population growth leading to widespread scarcity and economic turmoil.

The divide was bitter.

A contemporaneous New York Times Magazine piece described Ehrlich and his wife ridiculing an article of Simon’s:

‘They provided the simple arithmetic: the planet’s resources had to be divided among a population that was then growing at the unprecedented rate of 75 million people a year. The Ehrlichs called Simon the leader of a “space-age cargo cult” of economists convinced that new resources would miraculously fall from the heavens. For years the Ehrlichs had been trying to explain the ecological concept of “carrying capacity” to these economists. They had been warning that population growth was outstripping the earth’s supplies of food, fresh water and minerals. But they couldn’t get the economists to listen.

‘“To explain to one of them the inevitability of no growth in the material sector, or…that commodities must become expensive,” the Ehrlichs wrote, “would be like attempting to explain odd-day-even-day gas distribution to a cranberry.”’

So in 1980, the two made a bet.

The famous bet

If commodities must become more expensive as a function of population growth, then commodity prices will be dearer in the future. Simon thought otherwise, he bet prices would decline.

So, he let Ehrlich pick a basket of metals and the future date at which the bet will be decided.

In the end, Simon won the bet and Ehrlich paid up.

Each of the metals chosen by Ehrlich declined in price when adjusted for inflation.

The New York Times Magazine summarised why:

‘Prices fell for the same Cornucopian reasons they had fallen in previous decades — entrepreneurship and continuing technological improvements. Prospectors found new lodes, such as the nickel mines around the world that ended a Canadian company’s near monopoly of the market. Thanks to computers, new machines and new chemical processes, there were more efficient ways to extract and refine the ores for chrome and the other metals.

‘For many uses, the metals were replaced by cheaper materials, notably plastics, which became less expensive as the price of oil declined (even during this year’s crisis in the Persian Gulf, the real cost of oil remained lower than in 1980). Telephone calls went through satellites and fiber-optic lines instead of copper wires. Ceramics replaced tungsten in cutting tools. Cans were made of aluminum instead of tin…The most newsworthy event in the 1980’s concerning that metal was the collapse of the international tin cartel, which gave up trying to set prices in 1985 when the market became inundated with excess supplies.’

Simon would later expand on his thinking in The Ultimate Resource, a book that would go on to sell far fewer copies than The Population Bomb.

In that book, he summed up the thesis informing the bet:

‘Greater consumption due to an increase in population and growth of income heightens scarcity and induces price run-ups. A higher price represents an opportunity that leads inventors and businesspeople to seek new ways to satisfy the shortages. Some fail, at cost to themselves. A few succeed, and the final result is that we end up better off than if the original shortage problems had never arisen. That is, we need our problems, though this does not imply that we should purposely create additional problems for ourselves.’

In the end, the eponymous ultimate resource is us — our ability to adapt and innovate:

‘The main fuel to speed the world’s progress is our stock of knowledge, and the brake is our lack of imagination. The ultimate resource is people — skilled, spirited, hopeful people — who will exert their wills and imaginations for their own benefit as well as in a spirit of faith and social concern.’

So, what does this have to do with lithium-ion batteries?

Innovation, scarcity, and electric vehicles

Scarcity is not static. It goads as much as it constricts.

If businesses find crucial inputs too cumbersome to secure, they don’t just acquiesce to the conditions. They seek to change them.

Take rare earths.

In its 1H23 investor presentation released last month, Lynas Rare Earths [ASX:LYN] said rare earths are ‘essential to the global energy transition’, with demand growing for electric vehicles.

But at the start of this month, echoes of the Ehrlich-Simon bet played out at Tesla’s Investor Day.

At its Investor Day presentation, the EV automaker unveiled plans to create motors that don’t use any rare earth materials.

Shares of rare earth miners fell on the news, including that of Lynas.

Many in the industry called this an overreaction.

US-based rare earths miner MP Materials reacted to Tesla’s news with a yawn emoji, then elaborated that automakers will ‘buy much more rare earths in the future’:

Others pointed out that Tesla represents a sliver of overall global demand for rare earths.

Analysis from Adamas Intelligence suggests the global rare earths magnet market would ‘lose a mere 2% to 3% of demand in the near-term, and maximum 3% to 4% over the long-term assuming Tesla maintains its EV market leadership’.

But I think we shouldn’t analyse the impact of Tesla’s announcement too literally. What it really symbolises is adaptation.

Is there a risk we extrapolate present scarcity too far into the future without accounting for entrepreneurial responses to that scarcity?

Tesla’s goal to eliminate rare earth inputs is but an illustration of such entrepreneurial responses.

And consider the vaunted lithium-ion battery.

A five-year-old probably knows by now that materials like lithium, nickel, and cobalt are vital elements in the batteries powering electric vehicles.

Less known is the fact that automakers are heavily experimenting with chemistry compositions that seek to bypass these in-demand and currently costly materials.

My colleague Selva wrote about this last month:

‘Nickel manganese cobalt oxide (NMC for short) is the dominant lithium-ion EV battery today, where nickel is the main ingredient.

‘But lithium-ion phosphate (LFP) batteries have been increasing in popularity.

‘LFP batteries have some clear advantages.

‘They contain no nickel, which is in tight supply. Or cobalt, a critical material that’s concentrated in the Democratic Republic of Congo (and its production has been problematic, to say the least).

‘LFPs are also cheaper and more stable, but the drawback is that they have less range.’

LFPs aren’t the only way the industry is responding to the rising prices of key inputs like lithium.

Some are experimenting methods to obviate the need for lithium altogether.

As Selva wrote (emphasis added):

‘But one thing to keep in mind is that when it comes to batteries, nothing is set in stone, and there could be a lot of disruption on the way.

‘The battery industry is furiously focusing on two areas.

‘One is to improve today’s lithium-ion batteries to make them cheaper. It’s why LFP batteries have been gaining ground.

‘The other is that they’re working on alternatives to lithium-ion batteries, since lithium-ion batteries require plenty of critical materials and aren’t the best when it comes to things like stationary energy storage.

‘There’s been plenty of companies experimenting on different types of batteries, such as solid-state batteries, iron flow, or zinc-ion to name a few.

‘In fact, CATL has been working on a sodium-ion battery, which uses sodium instead of lithium — sodium is way more abundant and cheaper than lithium — and could start producing them as soon as this year.

‘Let me just be clear, though, this is all at very early stages and experimental.

‘But the way I see it, when it comes to batteries, there are plenty of opportunities in critical minerals and companies developing alternative battery technologies for the battery of the future.’

When you’re making bets about the future, take heed from the famous bet between Ehrlich and Simon.

The surest bet of all may be continued innovation.

Regards,

Kiryll Prakapenka,
Editor, Money Morning