Disruptive innovation: is it different this time?

House Mountain Partners’ Chris Berry looks at the
threats and opportunities for the battery and renewable
energy sectors and asks: Is it different this time?

“It happens slowly, then all at once.”

When Ernest Hemingway wrote this quote in his 1926 novel titled The
Sun Also Rises, he could hardly imagined how pertinent the phrase
would be 89 years later when applied to the critical minerals and metals
sector and associated supply chains.

While the comparisons to Hemingway’s novel and today’s world
may end there, it does seem as if there are several forces converging to
accelerate change on a massive scale.

These forces which underpin technological disruption and innovation
are not new.

Primary among these is the continued increase in computing power
and with it the decrease in cost. According to IBM, from the beginning of
recorded time to 2003 humans created 5 billion gigabytes (GB) of data.
In 2011, the same amount was created every two days. By 2013, the
same amount was created every ten minutes.

The advances in computing power driven by Moore’s Law style
cost declines have served to make computing technology practically
ubiquitous around the globe. The leveling of the global playing field
through easy access to massive amounts of information can only help
push innovation and entrepreneurialism forward.

Second, despite headlines to the contrary, globalisation slowly
continues to power forward as the world’s middle class enlarges its
ranks, primarily in Asia. According to The World Bank, China is only
53% urbanised and India is 32% urbanised. Many economist and
demographers believe that a society is fully urbanised at 75%. Clearly
several hundred million citizens in these countries have yet to experience
a higher quality of life through a more commodity centered lifestyle.

Third, sustainable growth, driven by disruptive technologies and
business models will continue to be of paramount importance. With the
price of lithium-ion batteries, per kilowatt-hour, falling at roughly 14%
per year, and the price per watt of solar power also declining rapidly,
combining these technologies is an example of how access to and use
of energy will change to the betterment of humanity.

Threats to Growth

According to a study by Bank of America Merrill Lynch, solar and wind
power are forecast to comprise 80% of new electricity generating
capacity to 2030.

There are more statistics like these which bolster the bullish case for the
metals and minerals consumed in battery and electricity supply chains,
however they must be set aside to present a balanced analysis of the
future by pointing out some of the threats to this growth thesis.

Though positive momentum is obvious, there are threats to the thesis
of technology fuelled growth. First among them concerns the billions of
dollars in R&D money being funneled into building a better battery.

The raw materials and pros and cons for various lithium-ion
chemistries are well known and the individual(s) who can overcome
these limitations – cycle life or power density, for example – will go
down in history as having solved one of the great physics and chemistry
challenges of our time.

With various companies currently building multi-billion dollar supply
chains around existing chemistries, what would a breakthrough mean
for their respective businesses if such a development rendered certain
raw materials obsolete? Perhaps a lithium ion battery with little or no
cobalt? Could these supply chains adjust?

These are questions worth considering despite the to commercialise time it would take new battery chemistry.

Technology may not be the savior we believe it to be after all.

A second challenge concerns the performance of the macro
economy since the Great Recession. It is now believed that excessive
sovereign debt issuance effectively bridged the gap in an attempt to
revive demand. As an example, China implemented a 4 trillion RMB
($586 billion) stimulus package focused on loans to local governments
and the real estate sector.

These debts must ultimately be repaid and
without delving into a financial debate, growth must increase to cover
debt service payments. Any sustained decline in growth could put a lid
on domestic demand and hinder the impressive growth trajectory of
renewable electricity sources which require a wealth of critical metals
and minerals.

A close eye on the performance of China’s economy is imperative.
A final issue concerns raw material access. The potential impact on
demand for critical battery materials including lithium, cobalt, and
graphite should be well known to followers of Benchmark Mineral
Intelligence.

There is no doubt that there is enough of these materials
in resource, but is there enough of each mineable and available to
integrate into existing and soon-to-be built battery supply chains?
This question, above all others, looms largest. At what cost? How will
accessing raw materials affect their margins? Economics matters at
every point along a supply chain.

Fortunately, we are likely to learn the answer to these and other
questions very soon. As technology, urbanisation, and sustainability
converge, it appears that the lithium-ion battery revolution is no longer
happening slowly, but all at once, a fact even Mr. Hemingway would
marvel at.

Chris Berry is Co-Founder of New York-based House Mountain
Partners LLC. He is a writer, speaker and analyst focused on the
dynamism of energy metals and is co-author of The Disruptive
Discoveries Journal.