Why the Cost of Lithium Batteries Doesn’t Mirror the Price of Lithium
Many people wonder why the cost of batteries for electric vehicles (EVs) will continue to decline, even as the price of lithium, a key component in these batteries, rises sharply. This phenomenon can be likened to how the price of corn, a major component, does not dictate the retail cost of a box of cereal. In this article, we’ll delve into why the cost of lithium batteries doesn’t follow the rising trend of lithium prices.
The Corn Flakes Analogy
To understand this, let's use the corn flakes example. An 18oz box of corn flakes costs $3.28 at Walmart. Corn is the primary ingredient, and roughly 88% of the product is corn. Let's simplify the numbers and say the box contains one pound of corn. If one bushel of corn weighs over 50 pounds, we can assume that one bushel can produce around 50 boxes of corn flakes, which would sell for approximately $160.
In this scenario, if the price of a bushel of corn is $3.62, this is about 2.3% of the retail price of the final product. If the price of corn doubles tomorrow, do we have to double the price of a box of cereal? Not necessarily. We might raise our price by a nickel. It's the same with lithium and batteries.
Understating the Lithium Impact
A typical EV battery may contain 70 grams of lithium per kilowatt-hour (kWh) of capacity. If the battery costs $160 per kWh and the current cost of lithium is $16 per kilogram, the real cost of lithium content in that battery is likely to be just $1 per kWh or less than 1% of the price of the finished battery. The price of lithium is just one part of the overall manufacturing and processing costs.
Stable Lithium Prices Over Time
Lithium prices have remained mostly stable over the past five years, with a spike in 2018 followed by a decline. The all-time high of lithium prices was back in 2011. Despite the increase in lithium prices, battery costs have historically dropped each year due to economies of scale.
The Impact of Supply and Demand
The amount of lithium in an EV battery is relatively small—the total usage might be just 6 to 8 kg. As more electric vehicles are produced, demand for lithium increases, driving the price up. However, new mines are coming online, increasing the supply and reducing prices. The result is a gradual and expected increase in lithium prices, reflecting market dynamics rather than an unnaturally inflated rise.
The rise in lithium prices is a natural response to increased demand and limited supply. This is consistent with economic theory and is not an anomaly. As more lithium sources come online, the price is expected to stabilize or even decrease, similar to historical trends in battery manufacturing costs.
Fact Checking the Lithium Price Myth
The rise in lithium prices does not mean that the cost of lithium batteries will follow suit and skyrocket. In reality, the cost of lithium is not “going up like a rocket.” The all-time high was reached in 2011, and batteries have historically dropped in price each year due to economies of scale. The current increase is merely part of a cycle that the market is expected to adjust to.
Conclusion
The price of lithium batteries is influenced by a complex interplay of factors, including manufacturing processes, economies of scale, and supply and demand dynamics. While lithium prices have risen, the overall cost of lithium batteries continues to decline due to advancements in technology and the increasing availability of raw materials.
Therefore, the cost of batteries for electric vehicles is not solely dependent on the price of lithium; there are many other factors at play. Understanding these factors will help us better anticipate the future cost of EV batteries and the overall sustainability and affordability of electric vehicles.