Lithium chicken
March 28, 2023Keen watchers of the lithium market, myself included, saw many published articles this month about price, most of which were of the ‘headless chicken’ variety.
It’s time to introduce some nuance into the discussion.
First, what do we mean when we talk about ‘the lithium price’?
Most references are to ‘spot prices’ in China, which are down considerably from their frothy November highs.
‘Spot’ is a feature mainly of the Chinese domestic lithium market, not the rest of the world, where most business is based on contracts.
Outside of China, prices are holding up much better, which suggests a different set of drivers, not least continuing short supply.
SQM (Sociedad Química and Minera de Chile) often supplies lithium directly to end users outside China. For instance, under an agreement with LG Energy Solutions, SQM will provide the Korean company with around 55,000 metric tons of lithium carbonate equivalent (LCE) until at least 2029.
There are several obvious reasons why Chinese spot prices are down in Q1 2023:
- Q4 2022 was stacked high before EV subsidies ended
- Q1 is always ‘low season’ in China due to the Spring festival
- The sudden end of China’s ‘zero covid’ policy shocked the economy and disrupted output -— all of which encouraged de-stocking in the supply chain.
- De-stocking, as a phenomenon in any market, follows falling prices, and the one thing you can be sure of is that subsequent re-stocking will push up demand and costs again.
Making the most of this choppy water, China’s battery giant CATL began a domestic battery price war against its Chinese battery-making competitors.
CATL can dictate lower prices for some of its lithium supply, as it produces domestic lithium. CATL also carefully signalled falling prices by selling its shares in Australian spodumene supplier Pilbara Minerals.
Would it be unrealistic to wonder whether they might re-buy later?
Price wars are usually short-lived anyway, as they are expensive for the producer leading them and not worth pursuing once short-term objectives, such as increased market share, have been achieved.
Meanwhile, EU and US markets continued linking up to minimise Chinese influence.
The US govt agreed this month that EU minerals could be eligible for subsidies under the Inflation Reduction Act. At the same time, the EU introduced its own critical minerals law, with strict criteria set to encourage lithium supply from friendly jurisdictions.
Lithium mining is a long-term investment, and short-term fluctuations in China’s spot market do not alter the core value proposition of projects with solid fundamentals.
Even if new capacity this year does meet demand just in 2023, and that’s not guaranteed, lithium development projects will still serve a future market in a massive supply deficit.
And they probably won’t deliver to the Chinese spot market anyway, as many will be tuned into regional supply networks anxiously built by governments in Europe and North America.
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