LONDON (Reuters) - A rush to invest in new and expanded mines for lithium, a key ingredient in batteries used in electric cars, means material will flood the market just as fresh demand kicks in, potentially curbing price gains.
While demand for lithium batteries is due to soar, the market is on course for a global surplus next year or 2018 as miners gear up to expand output - overwhelming demand for the commodity by electric automakers such as Tesla Motors Inc. (TSLA.O).
It's not a new phenomenon. Other commodities have seen similar excitement about the future, such as uranium and rare earths. Investors chased bullish scenarios only to be disappointed when prices crashed due to excess supply or less than expected demand.
World lithium reserves are 14 million tonnes, according to the U.S. Geological Survey, and about half of these are being developed into projects.
Established lithium miners have announced in recent months a slew of expansion projects - many in the so-called lithium triangle in Chile, Argentina and Bolivia - while other firms are racing to build new mines.
Prices of lithium more than tripled in a matter of months up to April, before retreating slightly from peaks.
"We get a lot of clients who've been approached by mining juniors wanting funding to pursue yet another lithium project," said analyst Paul Gait at Bernstein in London.
"The danger is that everybody's jumped on it and fundamentally, geologically, the stuff is not scarce," he added.
Lithium is widely used in mobile phone batteries since it is the lightest of solid elements at room temperature and in coming years another surge in demand is expected as electric vehicles become more affordable and mainstream.
Rechargeable batteries accounted for 37 percent of global lithium demand last year, consuming 66,000 tonnes of lithium carbonate equivalent (LCE), up from 2,500 tonnes in 2000, according to Bernstein.
Next year, momentum is expected to gather pace for electric vehicles with the launch of Tesla's Model 3 (TSLA.O) and Chevrolet's (GM.N) Bolt, the first mass-market electric vehicles that can be driven for 200 miles on a single charge.
Tesla created a $5 billion "Gigafactory" in Nevada, which it says will reach full capacity next year and will alone produce more lithium ion batteries annually than were produced worldwide in 2013. bit.ly/2gDdn8S
The share of lithium demand from electric and hybrid vehicles is due to surge from 10 percent in 2015 to 33 percent by 2021, Macquarie analyst Stefan Ljubisavljevic said.
Strong demand pushed the market into a deficit in 2014 and the shortages over demand deepened last year, according to consultancy CRU. The tight market sent prices soaring.
Spot battery grade 99.5 percent lithium carbonate in China AM-995C-LTCB, where most lithium batteries are manufactured, rallied more than three-fold to a peak of 173,000 yuan in April from 52,000 yuan in October 2015.
Prices have since retreated to 124,500 yuan, but they are still more than double the price before last year's rally.
"There are extraordinary returns from high prices available at the moment if you can get the material to market," said Rebecca Gordon, CRU's head of technology metals and energy.
The strong prices prompted a rush of money into the sector by investors keen to build new mines, prompting a fight back from four big lithium producers, which announced expansions in an attempt to guard their market share.
Heavyweight producer Albemarle Corp (ALB.N) announced in February plans to more than double its output in Chile while rival FMC Corp (FMC.N) said in July it wanted to triple annual output to 30,000 tonnes over the next several years.
Together with junior miners ramping up production at their new mines, the global market balance is expected to tip into surplus in 2017 or 2018, Macquarie and CRU have forecasted respectively.
"Depending on the number of projects that eventually come on stream and the ramp up that they can achieve, a market surplus may emerge that could be as large as a 30 percent excess above total consumption levels by 2020," said CRU's Alex Laugharne.
Senior analyst David Merriman at consultancy Roskill agreed that lithium will soon move into surplus in terms of bulk output, but said it was less clear how soon there would be enough processing capacity.
"The complexity of producing battery-grade lithium compounds means even existing major producers could experience setbacks and delays in commissioning new production facilities," Merriman told the Mines and Money Conference in London.
Reporting by Eric Onstad; Editing by Veronica Brown and Susan Thomas