Phosphate (PO₄³⁻) is a naturally occurring source of phosphorous which plays a more than significant role in modern life.
By virtue of being nutrient-packed, it is used in agricultural operations as fertilizer and feed for livestock. Together, this accounts for well over nine-tenths of phosphate demand.
Due to its tremendous importance in the global agricultural chain, governmental bodies such as the European Union have classified it as a critical material.
However, this is only one side of the story.
Phosphates also play a central role in several other industries, particularly in the high-technology space.
Demand factors, geology, and refining
Estimates suggest that 85% of phosphate is used to make fertilizer, while 5%-7% is used as animal feed.
The remainder of the demand comes from high-end technology and industrial applications, including the production of batteries, particularly for auto manufacturers or large-scale energy storage operations.
These processes require a very high level of purity.
This is where the geology of phosphate deposits becomes important.
The bulk, in fact, over 95% of global phosphate rock deposits are sedimentary in nature.
These are accompanied by high levels of impurities, including cadmium, uranium, thorium, and heavy metals.
As per John Passalacqua, CEO of First Phosphate (CSE: PHOS | FSE: KD0), screening post-extraction at sedimentary mines yields phosphate rock which has a purity of 25%-34%.
This is further processed into Merchant Grade Acid (MGA) which is a medium-purity product that can be used in fertilizers and the livestock industry.
Global supply
Accounting for 85% of global reserves, Morocco is a crucial player in global fertilizer chains.
With most other countries reaching or nearing peak phosphate, global agricultural dependence on the Northwestern African nation is set to increase in the twenty-first century.
PPA from igneous deposits
Phosphates sourced from igneous deposits are a whole other ball game.
These contain trace impurities and low levels of sulfur, arsenic, and heavy metals.
After initial processing, purity levels of phosphate rock range between 38% to 41%, nearing the theoretical maximum of 42%.
This output can be further processed into MGA as well.
An additional stage of processing transforms this into Pure Phosphoric Acid (PPA), which is a key input in batteries, paints, fire extinguishers, beverage cans, pharmaceuticals, and cosmetics.
On account of their magmatic origins, such high-purity phosphates are scarce to come by and account for only an estimated 5% of global phosphate reserves.
These are found primarily in Brazil, Canada, Finland, Russia, and South Africa, of which 50% of the deposits are based in Russia.
Passalacqua notes that unlike the sedimentary reserves, of which only 10% can be utilized to produce PPA (after multi-stage processing), 90% of igneous phosphate deposits can be used for this purpose, making these highly limited reserves highly valuable.
Pricing
The global standard for phosphate pricing is Moroccan rock phosphate which is currently trading at USD 345 per ton.
With igneous rock phosphate containing roughly a third more phosphate, this segment of the market trades at roughly a third more than the Morrocan standard.
According to Passalacqua, only three or four major players produce PPA for the Western market, with trades being settled via direct agreements at roughly between USD 3,000 – USD 3,500 per ton.
The EV battery investment thesis
With the rising focus on ESG and emphasis on decarbonization to manage road emissions, electric vehicles have become a cornerstone of net-zero strategies.
As a result, lithium-ion batteries are much more prevalent than a few years ago.
However, drilling down, there are mainly two classifications of these batteries.
The first, and more commonly used, are the NMC or nickel-manganese-cobalt batteries, which can be found in smartphones, laptops and most EVs.
In 2022, the International Energy Agency (IEA) estimated that 60% of EV batteries relied on NMC chemistry.
However, lithium-iron-phosphate (LFP), an alternative lithium-based battery, for which high-grade PPA is a critical input, has witnessed a recent surge in buyer interest.
The IEA reported that in 2021, 27% of electric light-duty vehicles (LDVs) were fitted with LFP batteries as compared to 17% in the year before.
The LFP batteries have some distinct advantages over the more traditional NMC technology, including, a much longer life; non-toxic, environmentally-friendly, and recyclable components; significantly lower quantities of lithium utilised; better fire safety profiles; a more stable structure and lower capacity loss ensuring consistent performance despite temperature variations.
Due to the relative simplicity of the manufacturing process as well as the reduced lithium input, market prices of these batteries tend to be very competitive, with Passalacqua noting,
…the (LFP) cathode active material… is much cheaper than the NMC battery, sometimes up to 50 to 66 per cent cheaper…
NMC batteries, on the other hand, have a significantly longer range and much higher energy density.
Samrath Kochar, Founder and CEO of Trontek notes the difference in the charging cycle life with NMC technology extending to 8,000 times and LFP ranging between 3,000-6,000 depending on the level of maintenance.
Often pitched as competing with NMC systems, Passalacqua believes that,
…the LFP batteries (are) developing into…the battery of…the middle class. The mass adoption battery because they are cheaper, so you can get the price of the vehicles down lower.
In addition, the LFP tends to hold a charge for approximately 300 kilometres which is very suitable for city driving.
He adds,
…whereas the NMC batteries will remain the battery of… higher performance and… longer-use driving. Both of them are very complementary together.
NMC systems would continue to have interesting applications in electrified public transport and inter-city services.
Market adoption
Stellantis, Tesla, Mercedes-Benz, Daimler and Hyundai are some of the names that have launched or are in the process of launching LFP-powered EVs.
In March 2023, Ford committed to invest $3.5 billion in a US-based LFP battery plant.
Other than in auto production, LFP batteries are gaining traction in the energy storage industry due to their lightweight and compact nature.
Analysts at Fortune Business Insights forecast that the LFP battery market will grow from $10.1bn in 2021 to $49.96bn by 2028 at a CAGR of 25.6%.
Simultaneously, annual global PPA production declined by 4 million metric tons between 2017 and 2021.
Thus, competition for PPA will become fiercer as a host of industries look to secure much-needed raw material supplies.
What investors should consider
Phosphate operations, whether as miners or refiners, cannot be operated without sophisticated logistics, adequate road infrastructure, and preferably access to a coastal port to enable exports.
Finding these elements can be challenging, given that reserves are often located in inhospitable locations.
Moreover, with concerns about phosphate supply peaking, access to igneous rock-based phosphate deposits within jurisdictions that are geopolitically sound and insulated from global supply chain upheaval is becoming increasingly vital.
Thus, in the years to come, igneous rock phosphate deposit mines, and ‘technological phosphates’ are likely to present increasingly attractive commodity investment opportunities.
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