Growth in electric cars will be “insufficient” to offset rising supply of lithium from Chile, according to analysts at Morgan Stanley, who forecast prices dropping by 45 per cent by 2021.

New lithium projects and planned expansions by the largest producers in Chile “threaten to add” around 500,000 tonnes per year to global supply by 2025, the bank said.

“We expect these supply additions to swamp forecast demand growth,” Morgan Stanley said.

Lithium prices have more than doubled over the past two years as demand surges for the key battery raw material due to growth in electric cars. A Tesla Model S uses more lithium in its batteries than 10,000 smartphones, according to estimates by Goldman Sachs.

Carmakers are scrambling to lock up supplies of the white metal, to back ambitious rollouts of electric cars. Tesla is in talks with Chile’s SQM over supply of lithium hydroxide, Chile’s regulator said in January.

This year will the be the last year of a global lithium deficit, however, Morgan Stanley said. There will be “significant surpluses” from 2019 onwards, the bank said.

“It would take much higher EV penetration rates to offset these surpluses and balance the market,” the bank said.

Battery electric cars would have to make up 31 per cent of global sales in 2025 from less than 2 per cent currently to “clear the market,” they said.

Morgan Stanley forecasts the price of lithium carbonate will fall from $13,375 a tonne to $7,332 a tonne by 2021, and then towards its marginal cost of production at $7,030 a tonne thereafter.

The bank also downgraded its ratings on the stocks of the two largest producers of lithium, Albemarle and SQM, to “underweight” from “equal weight.”

Over the past years both companies have secured an agreement with Chile’s regulator to expand production capacity in the country, which has the world’s largest reserves of lithium. The two companies will alone add an additional 200,000 tonnes a year of lithium by 2025, increasing Chile’s share of the market to a third of global supply, it said.

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