MAE101 Economic Principles

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MAE101 Economic Principles

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MAE101 Economic Principles

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Course Code: MAE101
University: Deakin University

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Country: Australia

Question:

Consider the chart (above) of Lithium Carbonate prices and focus specifically on the Global weighted average price (red series). Discuss the pattern in global lithium prices over the past 3 years.
Identify and discuss 2 economic factors that help to explain the broad trend and/or broad changes in the trend in lithium carbonate prices over the 3 year period from 2016-2018.
Question 3 – The Market for Lithium
This question requires you to draw your diagrams electronically using the Insert o Shapes feature in MS Word or MS Powerpoint.
Consider the market for lithium. Using a single, fully-labelled demand and supply diagram, illustrate the combined demand and supply effects that have taken place in the lithium market over the past 3 years. Discuss the factors that have driven the changes to demand and supply and the effect on equilibrium price and quantity.
 
Using a fully-labelled demand and supply diagram representing the market for oil, illustrate the likely long-term effects that the lithium market might have on the market for oil. Provide an explanation of your analysis as well as the relationship between the two markets. [Note: You donot need to use actual data for this diagram and you can assume the market is competitive as assumed in Chapter 4 of Gans et al. (2018)].
What effect might the increasing availability of lithium over time have on the own-price elasticity of demand for oil? [Note: You do not have to show this in your diagram]

Answer:

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.
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.
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. Although the price of lithium started to rise in 2017, the price of lithium went down slightly in January 2018.
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.
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.
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.
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.
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: https://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].

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