A steep decline in lithium prices may help lithium-rich battery chemistries beat out nickel-rich chemistries in the battle for electric vehicle dominance, analysts told S&P Global Commodity Insights.

Battery demand from the automotive and transport sectors is expected to grow at an annual rate of about 24% through 2030, according to a "Battery Market Tracker" report released in February by Commodity Insights. Lithium-iron-phosphate (LFP) batteries rely on lithium more, and thus stand to benefit from an overabundance of the silvery metal that developed over the past year. LFP batteries have always been cheaper than higher performance nickel-manganese-cobalt (NMC) batteries, and the cost is expected to drop even more as lithium prices come down from 2022 highs.

The price drop has helped LFP batteries gain traction in markets outside of China, where the chemistry is already dominant. An LFP battery is about $6/kWh cheaper than the cheapest NMC battery, the NMC-811, according to Benchmark Mineral Intelligence, a consulting firm. The NMC-811 cathode contains eight parts nickel to one part each manganese and cobalt.

"Reduced lithium costs have the potential to accelerate the adoption of LFP," Aran Waid, a senior analyst at Benchmark Mineral Intelligence, told Commodity Insights.

Sticker price differences

The cost of a battery pack is affected by the price of the raw materials used in the cathode, which comprises 40%-60% of the overall battery cell cost, depending on the chemistry, according to BloombergNEF.

A broad drop in battery metal prices decreased the overall cost of the average battery pack by about 30% year over year in 2023, Commodity Insights analysts said in a January report.

Decreased lithium prices have had much more of an impact on LFP batteries. Lithium carbonate comprised 89.4% of total raw material costs for LFP cathodes and lithium hydroxide made up 62.9% of raw material costs for NMC-811 cathodes in 2023, according to Commodity Insights data. Lithium hydroxide is a chemical that has historically been more expensive but has tracked closely with lithium carbonate in recent years.

The CIF Europe lithium hydroxide price was $15,500 per metric ton as of Feb. 21, down by 78.5% compared to the high set in 2023. The CIF Europe lithium carbonate price was also $15,500/t on Feb. 21, down 76.2% from its 2023 high.

"Lower lithium costs could help LFP maintain or expand its cost advantage if nickel pricing increases," Ben Campbell, lead battery analyst at consulting firm E Source, said in an interview.

Nickel traded at or above $30,000/t in mid-2022, after coming down from a stratospheric high during a March 2022 short squeeze, but the London Metal Exchange cash price for nickel has been below $20,000/t since Sept. 11, 2023. On March 5, the LME cash price for nickel was $17,525.75/t, data from S&P Global Market Intelligence shows.

"LFP has been historically cheaper 99% of the time compared to NMC. And it's because you don't have expensive nickel and cobalt in the LFP battery," Campbell said.

The cost of cathode active materials in LFP batteries dropped by 40.5% from 2022 to 2023, reaching $21.93/kWh, while the cost of raw inputs in NMC batteries only decreased by 29.4% to $37.91/kWh, Commodity Insights data shows.

Performance or cost

Automakers looking to adopt LFP chemistries over NMC must still take performance differences into account, analysts said.

NMC batteries have higher energy density and better performance in low temperatures, while LFP batteries trump in cost savings. Along with better performance, NMC has the benefit of a more diverse supply chain that allows EV and battery producers outside China to procure raw materials more easily.

"A hindrance ... lies in the insufficient investment in LFP supply both upstream and downstream, outside of China," Benchmark Mineral Intelligence's Waid said.

Supply chain pressures for LFP batteries increased after the US passed the Inflation Reduction Act in 2022. The act provides EV buyers with tax credits if the EV uses a certain amount of raw materials produced locally, or from free trade agreement partners. Companies are forbidden from using metals from countries referred to as "foreign entities of concern," defined by the federal government as China, Iran, North Korea and Russia.

"As a result, LFP has a really hard time to penetrate in that market," Ali Adim, senior research analyst of supply chain and technology at S&P Global Mobility, said in an interview.

The middle segment

Growing EV adoption is creating a new market that has yet to pick a chemistry.

"The middle segment, the volume market, is still undecided. It's much more price sensitive than the premium segment and then, on the other hand, you need to provide decent mileage and range for the vehicle," Adim said.

An emerging option that is fighting for this middle ground is the nickel-manganese-cobalt-aluminum (NMCA) battery chemistry, which adds aluminum to the NMC composition to "enhance driving range, safety and performance at reduced cost," Commodity Insights analysts said in the February report.

However, LFP batteries appear to be taking a lead that could accelerate if lithium prices stay low. NMC batteries' market share in the automotive industry is expected to decline to 42% in 2030 from 51% in 2022, Commodity Insights forecasts show. Meanwhile, the market share of LFP batteries will grow to about 41% by 2030 from 38%, and NMCA batteries will increase to 8% from 4%.

Analysts expect battery metal prices to continue to decline in 2024, while "advancements in cathode and anode chemistries ... new pack designs and improved cell manufacturing processes will be key to reducing prices to 2030," Evelina Stoikou, an energy storage analyst at BloombergNEF, told Commodity Insights.