Economics Assignment on Lithium Market: Supply, Demand and Price

This economics assignment discusses the lithium market, including its supply, demand, and price. It covers the oligopoly market structure of lithium in Australia, the factors affecting the price of lithium, and the demand drivers for lithium. The assignment also explores the relationship between the price of oil and lithium, and how lithium can act as a substitute for oil in the car industry.

Running head: ECONOMICS ASSIGNMENT
Economics assignment
Name of the student
Name of the university
Author note

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ECONOMICS ASSIGNMENT
Table of contents
Question 1..................................................................................................................................2
Answer i)................................................................................................................................2
Answer ii)...............................................................................................................................3
Question 2).................................................................................................................................3
Answer i)................................................................................................................................3
Answer ii)...............................................................................................................................4
Question 3).................................................................................................................................4
Answer i)................................................................................................................................4
Answer ii)...............................................................................................................................6
Reference list..............................................................................................................................7

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ECONOMICS ASSIGNMENT
Question 1
Answer i)
The article named “Australia is the new frontier for battery minerals” states that the
increasing demand of raw materials by China for making batteries for electric vehicles had
highly benefitted Australia. It states that the company Atlas Iron have shipped low grade iron
ore at value of A$3.5bn to China in the year 2011. The Australian mines of lithium, cobalt
and nickel have already shipped a huge amount of raw materials to the Chinese carmakers.
The demand for lithium is so high that it is expected to face shortage within a few years. The
lithium suppliers of Australia also claim that they provide a more secure of lithium and iron
ore for Chinese battery manufacturers (The Economist. 2018). However, it is quite doubtful
how much profit will the electric vehicles make as famous Chinese carmakers have already
experienced that full electrification of cars will take some to develop.
The second article mainly states the factors which affects the demand and supply of
lithium in the world market. According to the article provided, it has been found out that the
demand for lithium mainly depends on increase in the usage of lubricant grease, glass,
medicines, batteries and ceramics. It states that when the usage of electric vehicles increases,
the demand for lithium-ioned batteries goes up. The article also states that the demand of
lithium will increase in the preset as well as in the coming years (Leni 2018). However,
lithium is only produced by the four major players comprising of SQM, Albemarle, FMC
Corp and the Chinese producers. Therefore, it can be said the supply of lithium is mainly
dependent on these major players. It also states that Australia ranks first followed by Chile
and Argentina in the production of lithium.

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ECONOMICS ASSIGNMENT
Answer ii)
The market structure of lithium in Australia have an oligopoly market structure.
Lithium has known to become one of the important inputs for the production of batteries for
consumer electronics. The price of lithium has increased a lot due to the rise in the battery
dependent industries. Currently the market of lithium is operating under the oligopolistic
structure with only few of the companies controlling the vast majority of supply. As the
market structure of oligopoly states that only few of the independent firms dominate the
market, here in this case the Chinese producers, SQM, Albemarle and FMC Corp care mainly
the four major players in the lithium market. The firms in the oligopoly market structure
change their prices according to the competitors in the market. The firms in this type of
market structure cannot act independently and cannot make its own decisions (Leni 2018).
There are also few barriers to entry and exit. The market structure of oligopoly is such where
a number of firms are in competition. The four firm concentration ratios are been used for
quantitative description of oligopoly. Oligopolistic competition also gives rise to wide
ranging outcomes. Firms in case of oligopoly market structure collude for stabilizing the
unstable markets in order to reduce the risks for the product development. Oligopolies are
mostly price setters rather than the price takers. The products that are sold by the oligopolistic
markets are either homogeneous in nature or differentiated.
Question 2)
Answer i)
The chart in the question shows that the global weighted average price of lithium was
the lowest in the year of 2016. In the month of January 2016, the price of lithium was the
lowest between the years 2016-2018. However, the price of lithium seemed to rise from 2017
and was highest in the beginning of 2018. The price of lithium went down in July 2018.

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ECONOMICS ASSIGNMENT
Although the price of lithium started to rise in 2017, the price of lithium went down slightly
in January 2018.
Answer ii)
The two economic factors which will explain the changes in the price of lithium over
the period from 2016-2018 are due to the contracts of the rest of the world and the market
balance outside China. The contracts which are of longer-term nature of the markets outside
China will stimulate the prices of lithium in the short term. The pricing functions therefore
will prevent the price of lithium to fall too low in 2018. Secondly, the market which is
present outside China is known to be quite tight in nature. This state the long-term
sustainability of the market.
Question 3)
Answer i)
The demand for lithium is usually dependent on the lubricant grease, glass, ceramics,
health products and batteries. The demand for lithium is mainly dependent on the batteries of
the electronic vehicles. Lithium is also used in the ceramics industry for producing glazes.
Therefore, the demand for lithium is also dependent on the ceramics industry. The demand of
lithium also depends on the demand of batteries which is mainly used by the electronic
vehicles in China. Increase in the demand for batteries is known to be strong driver of
consumption of lithium. Some of the health products also uses lithium in minute quantities
which also acts as a major driver of consumption of lithium (Benchmark Minerals. 2018).
The greases that are mainly lithium based are known to have a good stability, water resistance
properties and characteristics of high temperature. Therefore, the demand of lithium is also
highly dependent on the usage of the lubricant grease.

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Quantity of lithium
Supply of lithium
Demand of
lithium
ECONOMICS ASSIGNMENT
As lithium is known to have an oligopoly market structure, the supply of lithium is
mainly in the hands of Chinese producers, SQM, FMC Corp and Albemarle. Therefore,
lithium is mainly produced by the four major players in the market. The main supplier of
lithium is Australia and the reserves of lithium exists in five continents. Chile which is the
second highest producer of lithium after Australia have a huge brine deposit. The supply of
lithium also depends on the amount of reserves held by Argentina as this is also one of key
players in the market of lithium. Though China is the fourth producing country of lithium, it
ranks second in lithium reserves. Australia is known to be the number one producer of
lithium in the world and therefore the supply of lithium mainly depends on the reserves.
Figure 1 Market for lithium
Price

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Quantity of lithium
P
1
P
Demand
Supply
ECONOMICS ASSIGNMENT
Answer ii)
Figure 2Market of oil and lithium
Due to increase in the usage of electric vehicles, the demand for oil which is needed
for transportation might get decreased. Lithium has a significant advantage over oil which is
lithium can be recycled unlike oil. Therefore, lithium can act as a big advantage in the car
industry. It can be said that lithium acts as a substitute for oil in the present market. Bot the
prices of lithium and the sale of electronic vehicles (EV) mainly gets influenced by the oil
price fluctuations. Lithium is also known to be one of the lightest metals in the world which
makes it one of the most energy dense battery materials. In this way lithium is found to be
superior than the oil. The price of lithium has also started to decline with the rise in demand.
When the increasing availability of lithium over time, the demand for oil will decline.
As lithium will act as a substitute of oil in the coming years, it will have a value of positive
cross price elasticity.
Price of oil

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ECONOMICS ASSIGNMENT
Reference list
Benchmark Minerals. (2018). China’s Lithium price decline is not the full picture to an
industry surging | Benchmark Minerals. [online] Available at:
https://www.benchmarkminerals.com/chinas-lithium-price-decline-is-not-the-full-picture-to-
an-industry-surging/ [Accessed 25 Dec. 2018].
Blomgren, G.E., 2017. The development and future of lithium ion batteries. Journal of The
Electrochemical Society, 164(1), pp.A5019-A5025.
Curry, C., 2017. Lithium-ion battery costs and market. Bloomberg New Energy Finance,
June.
Leni, B. (2018). The lithium supply and demand story | MINING.com. [online]
MINING.com. Available at: http://www.mining.com/web/lithium-supply-demand-story/
[Accessed 25 Dec. 2018].
Martin, G., Rentsch, L., Hoeck, M. and Bertau, M., 2017. Lithium market research–global
supply, future demand and price development. Energy Storage Materials, 6, pp.171-179.
Penner, S.S. ed., 2016. Lithium Needs and Resources: Proceedings of a Symposium Held in
Corning, New York, 12-14 October 1977. Elsevier.
The Economist. (2018). Australia is the new frontier for battery minerals. [online] Available
at: https://www.economist.com/business/2017/11/25/australia-is-the-new-frontier-for-battery-
minerals [Accessed 25 Dec. 2018].