Lithium prices are rising at their fastest pace in years, setting off a race to secure supplies and fueling worries about long-term shortages of a vital ingredient in the rechargeable batteries that power everything from electric vehicles to smartphones.
An index of lithium prices from research firm and price provider Benchmark Mineral Intelligence doubled between May and November and is up some 240% for the year. The index is at its highest level in data going back five years.
Driving the run-up are bets on continued scarcity. Demand is multiplying as Tesla Inc. and other automakers ramp up sales of electric vehicles. Supply, meanwhile, has been constrained by limited investment in new projects following a recent bear market and supply-chain bottlenecks. Producers often face environmental opposition and cumbersome permitting processes when trying to extract the silvery-white metal.
While there is plenty of lithium in the world, converting it into battery-grade chemicals is a long, expensive ordeal. With traders and corporate buyers riding momentum, prices are prone to big moves in both directions.
"It’s like being in a hot real-estate market," said Jon Evans, CEO of Lithium Americas Corp. , a startup working to produce lithium in Nevada that also co-owns a project in Argentina with a Chinese partner. "There’s a mad scramble."
Lithium Americas hasn’t produced any lithium but has a market value of roughly $4 billion after a recent share-price surge.
The rally is stoking fears about battery manufacturers and automakers obtaining enough material to meet electric-vehicle demand. Many companies also are coping with higher prices for other raw materials and key parts such as computer chips.
Even though commodities are a tiny part of total vehicle cost, they could contribute to rising average prices for lithium-ion battery packs, according to research firm BloombergNEF. That would be the first such increase in at least a decade. Years of tumbling battery costs have made electric vehicles more competitive with gasoline-powered cars.
High lithium prices are a boon for the small group of companies including Albemarle Corp. that dominate global supply and have reported resurgent sales recently.
Many others are rushing to tap into the excitement, sparking share-price gains that mirror the climb in shares of Tesla and electric vehicle stocks. The Global X Lithium & Battery Tech ETF has risen more than 40% this year, while shares of some lithium producers are up about 70% or more.
Shares of lithium companies are the main avenue for investors to wager on prices because there is no active futures market like there is for more heavily traded commodities such as oil.
Most lithium comes from countries such as Australia and Chile. There are two main sources: a salty brine that is pumped out of the ground and spodumene, a mineral contained in hard rocks. After extraction, chemical processes are used to make battery-grade lithium compounds.
China is the world leader in lithium chemical processing and battery production, a concern for U.S. policymakers and companies hoping to create a domestic supply chain but struggling to compete with China’s low costs and industry expertise.
Environmental opposition and permitting delays also are obstacles for companies, including Lithium Americas in Nevada and Piedmont Lithium Inc., a North Carolina-based producer. Environmental fears are limiting supply in commodities from oil to copper, helping buoy prices across the board.
The challenge for lithium producers is that it takes many years and heavy investment to get projects off the ground, creating mismatches between quickly growing supply and demand. Prices soared in 2017 and 2018, only to fall rapidly after companies ramped up output.
Some analysts expect a similar pattern to play out this time, but only if producers increase capacity and sentiment cools off.
"There’s enough lithium out there. The issue is the investment required to get there," said Eric Norris, president of Albemarle’s lithium unit, on the company’s earnings call last month.
Deal-making in the sector is on the rise. Koch Strategic Platforms, part of billionaire Charles Koch’s conglomerate Koch Industries Inc., earlier this month invested $100 million in Standard Lithium Ltd., a company that is working with a German firm to produce lithium chemicals in Arkansas. Koch Strategic Platforms has made several similar investments in startups and the battery supply chain.
In November, Mr. Evans’s company Lithium Americas outbid Chinese battery maker Contemporary Amperex Technology Co. — known as CATL — to reach a deal to acquire an Argentina-focused lithium producer for about $400 million.
Mining giant Rio Tinto PLC this summer pledged more than $2 billion to develop a lithium project in Serbia, but thousands of protesters in the European nation recently took to the streets to oppose the government potentially allowing the company’s extraction efforts that could harm the environment.
It was the latest example of environmental opposition possibly delaying permitting and production of a commodity that could help decarbonize the economy, analysts said.
"We have to strike a balance between overall global environmental benefits and local impacts," a Rio Tinto spokesman said in a statement. "We will not trade one over the other."
Some analysts see the flood of money piling into the sector eventually pushing supply up and cooling the rally. Citigroup analysts project demand will outpace supply this year and next year before production tops consumption through 2025.
But red-hot sentiment could still fuel price gains well into next year, some analysts say.
"It’s more about the perceptions that market players have, not the real shortages of the material," said Lukasz Bednarski, principal research analyst at IHS Markit focused on lithium. He expects a price correction at some point next year.