Supply & Demand Forces, Case Study of Lithium

This document discusses the supply and demand forces in the lithium industry through a case study. It explores the market structure, price trends, and the impact of lithium on other industries. The document also includes graphs and references to support the analysis.

SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM 1
SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM
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QUESTION 1 (ii)
https://www.economist.com/business/2017/11/25/australia-is-the-new-frontier-forbattery-
minerals
In their article “Australia is the new frontier for battery minerals” The Whizz of Oz has
presented Australia to be the leading country in the production of battery minerals like Lithium
and cobalt. Away from that, the article has gone ahead to enlighten us on the reason behind its
expansion when it comes on the mining sector of these minerals as the increasing demand in the
Chinese markets. In this perspective, the Whizz of Oz presents us with a scenario on how the
forces of demand and supply have played a major role in the expansion of this industry. It’s
through these forces of demand that we realize the many types of lithium but the difference in
their demand from the main market has brought about differences in the type which is mined
most. From the article also, we get to know that the increasing demand for these minerals has led
to most people venturing into the sector and hence its expansion (The Economist, 2017).
http://www.mining.com/web/lithium-supply-demand-story/
In his article “The lithium supply and demand story” Brian Leni enlightens on the
manner in which the forces of demand and supply are shaping the lithium mining sector as
compared to how the market used to be some few years ago. Brian manages to picture the power
of demand in the market by comparing the growth of lithium mining sector some few years ago
when demand for lithium components was low and currently when its demand is high (Leni,
2017). According to Brian, the lithium industry has increased following the increased demand
for lithium products currently. In regard to supply forces, Brian has shown that the low demand
for some of the lithium products has led to reluctance in their production and hence reduced

SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM 3
supply. Through the two approaches, Brian has managed to enlighten his readers on the forces of
demand and supply in shaping any market
QUESTION 1 (ii)
Classic Oligopoly market structure is the market structure that best describes the market
of lithium both in Australia and across the world. From Brian’s article “The lithium supply and
demand story” his statistics on Lithium reserves has indicated that just a few countries have
lithium and hence its market can be said to have been dominated by just a few countries. An
oligopoly is where the market is controlled by just a few countries or companies and that is
exactly what has characterized the Lithium market (Benchmark Minerals Intelligence Blog,
2018). The oligopoly in lithium industry and which has been commonly referred to as the
Lithium Cartel traditionally consisted of Sociedad Quimica y Minera, Albemarle, FMC
Corporation and Tianqi. These few firms regardless of the few others like Ganfeng which have
attempted to enter the market; they capture more than 85% of the world’s lithium production,
clear evidence that this market is an oligopoly market.

SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM 4
Question 2 (i)
The global prices of lithium have been rising for the past three years until the Q2 of 2018
when the trend changed and started to decline as depicted in the pattern of the above graph. The
prices began to spike in the Q1 of 2016 and the trend continued up to Q1 2018 when the average
prices of battery-grade lithium carbonate peaked. From an economic point of view, the slow
supply response to what can be seen as a period of relatively moderate demand is what has kept
the prices rising for the three years even beyond the early 2017 expectations (Gans, King,Byford,
and Mankiw, 2018).
However, the growing separation between the rest of the world and China’s lithium
prices became unsustainable and slower than it was expected in the last three quarters of 2018.
Coupled with the increasing domestic production mainly from Qinghai’s brines finally seen the
excessive price premiums come down in the Chinese markets in the second quarter of 2018.
Question 2 (ii)
The demand for battery-grade lithium carbonate- the main product obtained from lithium
carbonate is the battery-grade lithium carbonate and hence its demand affects the demand for
lithium carbonate. The high demand for battery-grade lithium carbonate has therefore been the
reason behind the hiking prices of lithium carbonate between 2016-2018 (McTaggart, Findlay,
Parkin, 2013)
Slow supply response- the slow supply response to what can be seen as a period of
relatively moderate demand is another economic factor which has led to increasing prices of
lithium carbonate. The slow supply response saw the demand of the lithium carbonate surpass
the supply and hence prices hiked to attain equilibrium.
Question 3 (i)

SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM 5
Price
P1
Q1 Quantity Q2
As indicated in the graph above, increased demand for battery-grade lithium carbonate which is
the main product obtained from lithium carbonate led to a relative increase in the demand for
lithium carbonate. The high demand for battery-grade lithium carbonate has therefore been the
reason behind the hiking prices of lithium carbonate between 2016-2018. In consideration to
supply, the slow supply response in the lithium industry, on the other hand, led to the low supply
of the product hence creating market disequilibrium which was responded by an increment in
prices
D1
S1
S2
D2

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Question 3 (ii)
As shown in the diagram below, the expanding markets for lithium and which is a
substitute source of power for oil will lead to a decline in the demand for oil. This is because of
the competition for the market by the lithium products.in consideration to the supply of oil, it
will increase following the decline in demand and that will translate into reduced market prices
for oil products as indicated. For that matter, the demand curve will move down while the supply
curve will move upwards
Demand and Supply graph in the Oil market.

SUPPLY & DEMAND FORCES, CASE STUDY OF LITHIUM 7
References
Benchmark Minerals Intelligence Blog (2018), China’s Lithium price decline is not the full
picture to an industry surging, retrieved from https://www.benchmarkminerals.com/chinas-
lithium-price-decline-is-notthe-full-picture-to-an-industry-surging/, accessed on 25 November
2018.
Gans J, King S, Byford M, and Mankiw N, (2018), Principles of Microeconomics, 7th edn,
Cengage, Melbourne.
Leni, B. (2017), The lithium supply and demand story, retrieved from http://
www.mining .com/web/lithiumsupply-demand-story/, accessed on 23 November 2018.
McTaggart, D, Findlay C, Parkin, M, (2013), Microeconomics, 7th edn, Pearson Australia,
NSW.
The Economist (2017), The whizz of Oz: Australia is the new frontier for battery minerals,
retrieved from https://www.economist.com/business/2017/11/25/australia-is-the-new-frontier-
for-battery-minerals, accessed on 23 November 2018.