Metals Commentary: Bright lights at end of long tunnel for lithium

Cold water was thrown on the lithium market in 2018, with prices falling and lithium miners’ equity prices falling alongside. We at Fastmarkets believe the price weakness has been front-loaded with the market deleveraging into the prospect of two-to-three years of supply surplus.

We expect further price weakness in 2019, though not as much as seen in 2018. However, it may take a while for a bullish price outlook to return as the significant supply response in 2018, which is forecast to continue in 2019, now means the bulls will have to wait for demand to outstrip supply again.

Given electric vehicles (EV) are positioned at the early stage on the S-Curve pattern of innovation, the demand outlook is exceptionally strong. Therefore, Fastmarkets is bullish for lithium demand over the next two to three decades.

Small, fast-growing markets tend to have exaggerated boom/bust cycles and 2019 to 2023 are expected to be years of oversupply for lithium. But, after that, supply is likely to once again struggle to keep up with the strong compound average growth rates (CAGR) that are expected to drive the EV and energy storage systems (ESS) markets.

While 2023 seems a long way away, given the likelihood that we may be surprised by even stronger EV and ESS uptake, we should be prepared in case a supply deficit returns before 2023.

Regional price trends

There are no benchmark or exchange prices for lithium yet; Fastmarkets MB focuses on spot prices in China and spot seaborne prices cif China, Japan and Korea (CJK) and duty paid Europe and US. In addition, there are the fob South America prices, which the price producers establish for their long term contracts.

The year 2018 has seen spot Chinese ex-works and cif CJK seaborne lithium price fall by around 53% and 27%, respectively, while producer prices, fob South America, have for most of 2018, avoided falling, but early signs are they have weakened in the fourth quarter. It should be remembered that fob prices had not climbed to the heights seen in spot prices, see chart. In the fourth quarter 2017, cif CJK prices averaged US$18.44 per kg, while Orocobre’s fob price over the same period averaged US$11.55 per kg. During the third quarter, 2018 cif CJK prices averaged US$17.25 per kg, while Orocobre’s fob price averaged US$14.70 per kg. The narrowing of the price difference highlights how fob prices have been converging with the spot price.

Prices lower on supply response

Fastmarkets believes that 90% of the price weakness in 2018 has been down to the supply response that has been seen five hard rock producers started up this year and, as they ramp-up next year, supply is expected once again to grow at a faster pace than demand.

Having seen five producers start in 2018, Fastmarkets expects there to be a bit of a lull in 2019, with the main focus being Nemaska’s scheduled start-up in the second half of the year, plus we expect some Chinese start-ups, too (Minmetals and Zangge Holdings).

That said, incremental increases are expected at existing producers and those that started in 2018 are expected to continue ramping up. We expect processed lithium supply to increase by around 87,000 tonnes, to 387,000 tonnes in 2019.

While supply tends to grow in batches, demand growth is expected to be far more consistent and exponential.

Demand – exponential growth

Indeed the surge in new lithium production in 2018 has to some extent masked the strong growth in EV sales.

New electric vehicle (NEV) sales in China increased 76% in the first 10 months of 2018, U.S. plug-in sales were up 72% over the same period and in Europe, plug-in electric vehicles sales increased 35% over the first nine months of the year.

Collectively across China, the U.S. and Europe, plug-in sales over these periods have increased to 1.4 million units, from 0.84 million units over the same periods in 2017.

EV sales are starting off a low base, with the data above suggesting a 65% increase in EV sales across these regions in these time frames.

Fastmarkets’ forecast was for 69% growth in EV sales in 2018, which we may well see as Chinese NEV sales have previously been heavily weighted into the final months of the year.

However, even 69% growth in EV sales would only mean lithium demand would increase by around 23,600 tonnes, so the recent production increases swamp the demand growth. But, the key is that year-after-year of high CAGR will rapidly turn into large annual increases in demand, which the supply chain may struggle to keep up with.

For example by 2025, our forecast is for plug-in EV sales to grow at 38% CAGR, which will mean an EV penetration rate of 16%, with some 17 million EVs being sold annually that year. This would require some 584,000 tonnes of lithium for EV batteries. In terms of GWh, 17 million EVs with an average battery size of 48 KWh, would require around 800 GWh of batteries.

This raises the question of whether there will be enough battery capacity to supply the accelerated EV and ESS growth.

We think there will be, given hardly a week goes by without another announcement of a new battery factory plan, some of which are as large as 80 GWh. Given how well telegraphed the EV and ESS demand outlook is, we expect there will be no shortage of downstream capacity either at battery manufacturers or at EV manufacturers.

Indeed, as is so often the case, the enthusiasm of Chinese businesses is, if anything, likely to lead to a situation of oversupply of battery manufacturing capacity.

This should keep battery prices low and that in turn is likely to foster a faster and broader rollout of ESS across commercial and residential markets, all boosting demand for battery raw materials.

By 2025, we expect lithium demand from EVs to be rising at a rate of 180,000 tonnes per year and total lithium demand to be rising at 220,000 tonnes per year. To put that into context, Pilbara Minerals is expecting capacity of 100,000 tonnes once Stage 2 is commissioned, so by 2025, the market will need the equivalent of two large new mines a year.

Given this, the upstream lithium supply chain probably has no time to dawdle, as seven years is not a long time when you are talking about bringing on new mines.

Headwinds before tailwinds

Given the need for a lot more production capacity in the years and decades ahead, the last thing the market needs is for price dips to lead to cuts in producers’ capital expenditure.

Lithium being an old but small market has traditionally been left to its own devices and, as such, only a handful of traditional producers have been involved. In the past decade that has changed, initially driven by extra demand from the consumer electronics market, but more recently the pace of change has accelerated as the EV era has emerged. The sudden pick-up in interest has caught the financial markets unprepared – many banks have not been active in early-stage financing, with most of the junior miners having to rely on private placings, offtake agreement and, more recently, joint ventures.

Given lower lithium prices and oversupply, there is a danger that junior miners without adequate financing in place, now suffer delays in bringing on their production. This could make for even tighter supply in the mid-2020s. Fastmarkets, however, expects that financing will be forthcoming, not so much from banks, but from the downstream supply chain and OEMs. Banks may get more involved once lithium prices are quoted on an exchange as that could help them offset their risk.

The OEMs have invested billions in new battery and EV factories – the last thing they will need is a shortage of raw materials. As such, Fastmarkets expects a lot more activity in M&A, joint ventures, partnerships and offtake agreements, which should help avoid some of the delays that a boom/bust cycle would have otherwise caused.

Forecast

Fastmarkets’ forecast is for prices to remain under pressure in 2019. We expect Chinese spot battery grade ex-works prices to average 71,500 yuan per tonne, compared with 78,500 yuan per tonne in December, and for cif CJK to average US$10.25 per kg, compared with US$14 per kg in December. We expect prices to start picking up again in 2022, as supply/demand surpluses begin to shrink and the outlook improves.

Even though the market may still be in a supply surplus in 2022, the prospects for a brighter outlook is expected to encourage restocking. The start of new manufacturing capacity will also require working stocks, which will add to apparent demand.

While we expect prices to remain lower over the next few years, once a period of supply deficit looks to be on the cards, we expect significantly higher prices again as EVs and ESS will be mainstream, and consumers will have no option but to chase prices higher if they are short of material.

Our forecast for 2025 is for spot prices cif CJK to be back at US$25 per kg, which would put Chinese ex-work prices back around 180,000 yuan per tonne.

Low prices in the years ahead are expected to prompt more M&A activity, joint ventures, partnerships and offtake agreements, all of which will be a sign of confidence in the medium and long-term outlooks. But as more offtake agreements and long-term contracts are negotiated, Fastmarkets expects the industry will demand a benchmark price, with contract prices then settle basis the benchmark, plus or minus adjustments for quality, quantity and location.

— William Adams is head of research for base metals & battery materials at Fastmarkets (Metals & Mining). For further details on Fastmarkets’ prices and market forecasts, contact Adams at william.adams@fastmarkets.com.

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