LONDON, June 3 (Reuters) - It's a tough time to be a

lithium producer as the light metal sinks under the weight of

excess supply.

Lithium hydroxide prices have collapsed by 90% from

their 2022 peak and show no signs of recovery.

Multiple producers are now operating at zero or negative

margins, according to consultancy Wood Mackenzie. Even giants

like Albemarle, the world's largest producer of the

battery metal, have been cutting costs and deferring new

projects to weather the supply storm.

Rio Tinto, however, is undaunted. The global mining

house remains "consistent in its belief in the long-term outlook

for lithium".

The company is putting its money where its mouth is,

snapping up U.S.-based producer Arcadium for $6.7 billion and

partnering with Chilean state entities on two projects.

It's a big call, given the current despondency in the

market, but Rio believes demand will be strong enough both to

absorb the current excess and pull the market into deficit

around the turn of the decade.

It's a bet that lithium will remain the dominant battery

metal in a fast-changing landscape.

LOW PRICE, HIGH DEMAND

The weakness in the lithium price results from too much new

supply hitting the market at the same time.

Global lithium production grew by over 35% year-on-year in

2024, according to the International Energy Agency (IEA). New

mines are still ramping up and Chinese players show little

appetite for cutting production.

The supply tsunami, however, masks the strength of lithium

demand. The IEA estimates global usage grew by 30% last year,

the increase being equivalent to the size of the entire global

market in 2018.

The electric vehicle (EV) sector, the biggest user of

lithium-ion batteries, is in robust health. Sales of new energy

vehicles rose by 25% last year and were up by 29% in the first

quarter of this year, according to consultancy Rho Motion.

Lithium use in energy storage systems is growing even faster

as global power systems pivot towards cleaner but intermittent

energy sources such as solar and wind.

Rio Tinto said it expects demand to grow at a compound

annual rate of over 10% through 2040.

DOMINANT METAL

The main threat to that scenario would be a shift in battery

chemistry as manufacturers compete to produce ever cheaper, more

efficient batteries.

There has already been a big shift away from more expensive

battery metals such as cobalt and nickel but to date lithium has

maintained its status as the dominant ingredient in the

chemistry mix.

The amount of nickel and cobalt deployed in new energy

vehicles was up by just 12% and 2% year-on-year respectively in

March, according to Adamas Intelligence. But lithium deployment

was up by 30%, matching the overall EV sales growth rate.

The battery materials battle, however, is far from over.

Chinese giant CATL has been pioneering the

development of sodium-ion batteries. The latest iteration,

Naxtra, will almost match in efficiency the lithium iron

phosphate (LFP) batteries that are displacing

nickel-manganese-cobalt (NCM) chemistries.

CATL's billionaire founder Robin Zeng sees sodium-ion

batteries potentially replacing up to half the market for LFP

batteries.

The IEA is less sure, noting that sodium-ion batteries are

most competitive in a high lithium price environment, which the

current one is certainly not.

Lithium's low price may be its best defence in fighting off

challenges from other materials.

It is also causing battery prices to fall, making new energy

vehicles cheaper.

MARKET ACCELERATOR

Average battery pack prices fell by 20% to a record low of

$115 per kilowatt-hour in 2024, the largest annual drop since

2017, according to the IEA.

The share of cathode raw materials in the battery pack price

fell to 10% in 2024 from over 20% in 2023 thanks to bombed-out

prices across the battery metals spectrum.

The shift to LFP batteries in the Chinese market has also

played a significant role in reducing costs since they are 30%

cheaper than the NCM batteries popular in Western markets.

European auto companies have taken note. Volkswagen

is adopting LFP technology as it aims for a

20,000-euro entry-level electric car for the European market.

Price has been one of the major deterrents for consumers to

go electric but the gap with conventional vehicles is narrowing.

In terms of EV sales, market forces are a powerful offset to

the headwinds from tariffs and U.S. President Donald Trump's

scrapping of his predecessor's green energy agenda.

SAFE BET

Lithium's battery metal crown looks safe for now.

Even assuming sodium-ion batteries start taking market share

in China, the impact on lithium will be mitigated by an

acceleration in the global EV revolution and growing demand for

grid storage solutions.

Moreover, the IEA points out that despite the interest in

novel chemistries, the primary driver of battery innovation

remains existing, conventional chemistries based on lithium.

Incremental improvements are being made all the time both to NCM

and LFP technologies.

Lithium demand is already growing phenomenally fast and

every indication suggests it will continue to do so in the next

few years.

But how long before demand strength translates into a market

deficit and higher prices will depend on how long the current

supply surge lasts.

Don't hold your breath. It could take a while.

The opinions expressed here are those of the author, a

columnist for Reuters.

(Editing by Alexandra Hudson)