Yet Another Question for EVs: Is a Lithium Bubble Forming?

The tulip madness of 1624 was a classic bubble - and lithium batteries could be next, warn the doomsayers.

The advent of numerous versions of electric vehicles (EVs) by the end of 2010 has increased demand for the lithium-ion battery packs that will be in most EVs. And way too many suppliers are chasing the market, contends Roland Berger Strategy Consultants, a Munich-based industry consultant.

The firm sees the over-supply developing between 2014 and 2017, "especially in the U.S. and in Japan," and it predicts that only six to eight firms will make it to 2017. According to Wolfgang Bernhart, a Roland Berger partner, "Unfavorable factors are piling up. But managed correctly, electrified power-trains will still be a profitable market in the future."

Oliver Hazimeh, director and head of the global e-mobility practice at PRTM, a global consultancy based near Boston, takes a decidedly different view. "People are saying, 'Why should we invest in this space if there is a bubble?" he said. But PRTM is bullish on electric cars, and on li-ion batteries, too.

If you believe the firm's analysis that 10 percent of auto sales by 2020 will be battery EVs and plug-in hybrids, then you'll probably concur that a a li-ion "shortfall" is on the horizon. But the plain fact is that nobody knows how big the EV market will be in the next few years. There are a host of competing factors - and li-ion demand follows directly from EV demand.

Demand is certainly increasing as EVs gear up for the marketplace. Toyota will be putting li-ion batteries in a variety of cars and Honda is switching to li-ion for its non-plug-in hybrid cars (including the Honda Civic Hybrid) in a few years. Honda Executive Vice President Koichi Konda said he likes li-ion for standard hybrid cars because it has higher energy density, enabling smaller battery packs. "Lithium will become a lot more prevalent," he said.

PRTM expects lithium-ion batteries to be a $60 billion business by 2020. Hazimeh acknowledges there may be over-capacity in the near term, but expects it to evaporate. "From what we can see that has been announced, in 2015 we will be slightly ahead of the need, but to just look at that one year as a bubble doesn't tell the whole story," he said. "The demand ramps up and the shortfall happens soon after that."

But the bears have a point, too. Concern about over-capacity of lithium-ion batteries dovetails with the concern expressed at a Senate hearing last month that while carmakers might be able to built four million EVs by 2015, demand could be much less than that.

There's also some worry that demand for the element lithium itself, abundant only in Bolivia, Argentina and China, will outstrip supply. "As awareness spreads that lithium is a crucial ingredient for hybrid and electric cars, a global hunt is under way for new supplies of the metal," the New York Times reported March 10.

Hazimeh demurs, saying there is enough lithium until at least 2030. "And it isn't lithium that drives up the price of li-ion batteries," he notes, adding that lithium is less than one percent of a battery's cost. "The high cost of manufacturing the cells is the issue. Approximately 70 percent of the value in a li-in cell resides in the cell."

Tulip or not? 2010 is not the year to answer the question. But it is a measure of how interesting the EV market is becoming that anyone is bothering to ask it.