Two of Australia's largest lithium producers are merging to cash in on the boom in demand for the metal due to its use in electric vehicle batteries.

Australian lithium giant Orocobre is buying its rival Galaxy Resources for A$1.78bn (£997m) to create a major global player as lithium prices climb.

The combined group will have a market capitalisation of A$4bn, making it the fifth most valuable lithium player in the world behind giants such as Ganfeng Lithium and Albermarle.

The two companies produce about 40,000 tonnes of lithium but have expansion plans putting them on course to produce 130,000 tonnes combined, from assets in Australia, Argentina, Canada and Japan.

"It's overwhelmingly positive," said Reg Spencer, of broker Canaccord Genuity. "On a high level, you have got significant synergies with both businesses having an Argentina base."

Analysts predict a deficit in lithium supplies from 2027 as economies start phasing out petrol and diesel engines to make way for electric alternatives.

The UK is among countries planning to ban the sale of new petrol and diesel cars, while post-pandemic stimulus money is also accelerating the shift by helping to expand charging points, for example.

Martin Pérez, Orocobre's chief executive, said the merger would provide "significant operational, technical and financial flexibility to deliver the full value of our combined portfolio".

Simon Hay, chief executive of Galaxy, added: "The merger represents an exciting opportunity to consolidate and realise the full potential of our asset portfolios and technical capabilities."

Galaxy shareholders will receive 0.569 Orocobre shares for each Galaxy share. Orocobre shareholders will own 54.2pc of the combined entity and Galaxy shareholders will own the remaining 45.8pc.

Separately, nickel and palladium producer Nornickel has struck a deal to supply Johnson Matthey with materials needed for battery production in Finland.

Moscow-based Nornickel plans to increase production of nickel and cobalt from its refinery in Finland as demand from electric vehicle battery makers in the UK grows.

Robert MacLeod, chief executive of Johnson Matthey, said securing the long-term supply of nickel and cobalt with Nornickel was "an important milestone".