Speculative bubbles in the price of lithium put energy transition and electric mobility at risk

The instability and volatility of the price of lithium in the international market may hinder the energy transition, especially electric mobility. This uncertainty could also hamper the future supply of this essential component for the manufacture of batteries.

"The prices of lithium, one of the most important minerals at present for the energy transition and the transport sector, are not very stable, and there is evidence of a significant presence of speculative bubbles," said Jorge M. Uribe, a member of the UOC's Faculty of Economics and Business, leader of the Finance, Macroeconomics and Management (FM2) group and lead author of this work together with other experts from the University of Barcelona and Colombia's Universidad del Valle.

"We tend to think that prices reflect the market's situation and that they automatically adjust to supply and demand, but this is not always the case. In the case of lithium, the situation is very delicate, because this mineral is essential to enabling the energy transition towards more sustainable and less polluting models in the mobility and transport sector. Without lithium, there is no way for electric vehicles to thrive and replace combustion vehicles," Uribe said.

In the last decade, lithium has become a highly prized mineral worldwide. It is currently the main component of electric vehicle batteries and is gaining importance in systems that store energy from the stationary market (i.e. buildings and residential properties).

"Currently, no technology is as efficient as lithium-based technologies for the production of batteries at a reasonable cost. That's why this mineral is more important every day, especially in the transport sector and in the transition to electric vehicles," explained Uribe. He also added that, even in stationary power generation, renewable energies (i.e. solar and wind power) are not able to produce energy at specific times due to the climate conditions, which means that "energy storage is a global priority today and will increasingly be so".

Complexity of the lithium market

Unlike those of other raw materials, the lithium market is fully globalized and suffers significant price fluctuations, often without any apparent cause and for reasons unknown to the agents involved in the sector. "We have found a very synchronized presence of several bubbles simultaneously with the lithium bubbles. This is probably due to the financial influence and the presence of agents that deal not just with lithium but rather invest in several markets," Uribe said.

The volatility and uncertainty generated by these bubbles could affect the introduction of electric vehicles as well as new transport models. The instability of lithium prices can make planning difficult because, faced with volatile prices, companies will not make important investments until they have assurance that the price and cost is real and stable, that they are responding to fundamental market rules rather than speculation or very short-term factors.

"The existence of a bubble in the lithium market delays all the implementations and progress made in the sector. For example, a company that wants to make an investment today is likely to prefer to wait two years to see how the market stabilizes and make sure that we are not in a bubble," said Uribe.

In the case of Spain, the situation may become even more complex, as energy transition and sustainable mobility plans have been designed with short or medium-term actions in mind. "Spain is more vulnerable than other nations outside Europe because its proposal for energy transition is very ambitious," he said.

Proposals to avoid speculation

To avoid the volatility of lithium prices and possible lithium bubbles, the authors of the study propose the adoption of measures such as stabilization funds and the creation of capital reserves. These strategies reduce the risks for producers, regularizing the market.

"These funds should ideally be in portfolios such as, for example, global gold-like stock markets. This guarantees a minimum price and removes the uncertainty of a sudden rise or collapse of the bubbles," he said.

Similarly, it is also necessary to design medium- and long-term planning by governments and large companies in the sector, with the aim of providing greater security and diversifying the operational risks inherent to the lithium market. "If no measures are adopted, there is a significant risk, as prices can fall very abruptly, causing lithium shortages," concluded Uribe.

This UOC research supports Sustainable Development Goals (SDGs) 7 (Affordable and Clean Energy), 9 (Industry, Innovation and Infrastructure) and 11 (Sustainable Cities and Communities).

Reference

Uribe, Jorge M. et al. "Price Bubbles in Lithium Markets around the World". IREA – Working Papers, 2021, IR21/10. http://hdl.handle.net/2445/176819

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