By Myra P. Saefong
Lithium supplies up in response to previous jump in prices
Not long ago, lithium prices were skyrocketing on fears of a supply shortfall, as growth in the electric-vehicle market lifted demand for the metal used in lithium-ion rechargeable batteries.
The tables have turned.
The average annual price for battery-grade lithium carbonate fell to $41,166 per metric ton in 2023, down nearly 40% from $68,075 in 2022, according to data from Benchmark Mineral Intelligence. Prices had dropped on a quarter-to-quarter basis, down about 38% in the fourth quarter.
Electric vehicle, or EV, sales in China hit a record, but fell short of forecasts, which hurt lithium demand expectations, said analysts at Benchmark Mineral Intelligence, led by Principal Analyst Federico Gay.
China's passenger EV sales growth slowed to 28% in third quarter of last year, from 108% in the same period a year earlier, Fitch Ratings reported, citing data from the China Association of Automobile Manufacturers.
"China is the world's largest EV market and [it] saw a considerable drop in the rate of growth of EV adoption," said Steve Schoffstall, director of ETF product management at Sprott Asset Management.
Worrisome signs
Worrisome signs in the market pointing to a slowdown in demand growth for electric vehicles spanned beyond China.
Globally, the proportion of consumers in key auto markets open to purchasing an EV dropped to 67% last year, from 71% in 2022 and 86% in 2021, according to an analysis by S&P Global Commodity Insights and S&P Global Mobility released this month.
"Higher interest rates are weighing on the automotive sector as the cost to purchase a car has increased considerably, and EVs have not been immune," said Schoffstall. "Higher costs of living and economic uncertainty" are also likely weighing on the auto industry as buyers put off making large purchases.
In October, Ford Motor Co. (F) reported an adjusted loss of $1.3 billion for its EV unit, attributed to "continued investment in next-generation EVs and challenging market dynamics." It said customers interested in EVs are "unwilling" to pay the vehicles' premium prices.
To be clear, EV sales are not falling, said Austin Devaney, chief commercial officer of Piedmont Lithium Inc. (PLL) , told MarketWatch. He said the EV market continues to grow, with "the rate of growth slowing from 'tremendous' to 'excellent'."
Last year, a record 1.2 million electric vehicles were sold in the U.S., according to estimates from Kelley Blue Book, a Cox Automotive company, with the EV share of the total domestic vehicle market at 7.6%, up from 5.9% in 2022.
The overall industry picture "remains bright with record EV sales, new companies, expanded vehicle offerings, and a growing charging infrastructure," said Devaney.
Not only are EV sales growing but the size of the batteries within the vehicles is growing, as drivers want longer range, he said. That's led to a nearly 50% increase in gigawatt hours (GWh) deployed, which includes significant growth in the energy storage sector, which is now about 15% of battery demand and "growing rapidly."
EVs are 'still a nascent industry, experiencing amazing innovation and growth but also some growing pains.'Austin Devaney, Piedmont Lithium
"This is still a nascent industry, experiencing amazing innovation and growth but also some growing pains," he said, with some of the auto companies, for example, realizing that the products they were offering weren't competitive in the market.
Lithium supply and prices
For now, lithium supplies may outpace demand, some analysts said.
Supply-wise, there have been several developments in regard to the available supply of lithium, "given the ramp up and commissioning of considerable new capacity globally," Benchmark Mineral's Gay told MarketWatch.
He specifically mentioned an agreement between Chilean state-owned mining company Codelco and Sociedad Quimica y Minera de Chile (SQM), one of the world's largest lithium producers, as one of the major supply-side policy developments. The companies in late December said they planned to form a partnership to jointly develop lithium in the Salar de Atacama, the largest salt flat in Chile.
S&P Global Commodity Insights expects the supply of lithium to top demand over the next few years, partly due to the supply response to the much higher prices seen in 2021 to 2022.
See archived story: Lithium supply may tighten in the years ahead, driving prices higher along with it (Sept. 20)
It said spot lithium carbonate prices climbed by more than 500% between June 2021 and December 2022 before falling about 70% by October 2023.
Following a drop in lithium prices over the past year as supply outpaced demand, Albemarle Corp. (ALB), among the world's biggest lithium miners, announced job cuts Wednesday as part of its efforts to reduce costs. Shares of Albemarle lost 33% in 2023.
"There was an excessive stocking of [lithium] inventory throughout the supply chain in late 2022 and early 2023, and some of that...resulted in a supply-demand imbalance, which led to lower prices in 2023," said Devaney.
Even so, there are expectations that demand will outstrip supply in the latter half of this decade, he said.
Over the past two years, more than $80 billion worth of battery manufacturing projects or expansions have been announced, said Devaney. Those projects would require "roughly 40 times the amount of current lithium hydroxide capacity in the U.S. to fulfill demand domestically - and the capacity from currently planned raw material production projects...doesn't come near that mark."
Sprott's Schoffstall said that governments are supportive of efforts to build EV battery supply chains and Sprott expects that trend to continue.
So while there may be a "slowdown in growth of EV adoptions, Sprott anticipates considerable growth over the longer term," he said.
"Lithium supply is expected to outstrip demand through 2026, after which point demand may moderately outpace supply through the end of the decade," said Schoffstall. Then as government and self-imposed manufacturer mandates approach, mostly by 2035, Sprott expects to see a "considerable supply deficit emerge."
The energy transition and move to cleaner energy sources, including EVs, is a multidecade shift in the way we produce and consumer energy," he said. "Though there may be bumps in the road, investors with a long-term view may benefit from growth potential and diversification offered by lithium miners."
-Myra P. Saefong
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By Nicholas Larsen, International Banker
It was among the best-performing commodities during the previous two years, as the breathless rally beginning in late 2020 saw the price of lithium skyrocket, largely off the back of booming sales of electric vehicles (EVs). Indeed, Bloomberg’s calculations found that the total spot value of lithium consumption soared from around $3 billion in 2020 to $35 billion in 2022. But the picture in 2023 could not be more different, as the market price of lithium has spectacularly crashed back down to earth, thus begging the question of what has happened to trigger such a dramatic reversal.
As a crucial raw material of the batteries used in EVs and electronic devices such as mobile phones, lithium is often named “white gold”, with these industries increasing their dependence on the silvery-white metal in recent years. The surge in demand for lithium batteries amidst a China-led EV boom—in the face of a largely constrained global supply of lithium that could not keep pace with it—underpinned the blistering price rally observed throughout 2021 and much of 2022.
But a combination of key market factors has led to a major turnaround in the trajectory of the benchmark price of lithium carbonate, which is used to produce the lithium hydroxide contained in electric-vehicle (EV) batteries. Prices have collapsed from all-time highs reached in mid-November 2022 of CNY 597,500 per tonne to CNY 319,500 per tonne by the week ending March 17—a near-47-percent drop that has seen prices return to levels last seen in January 2022.
On the demand side, this crash can be explained by the decidedly less bullish sentiment for EVs transpiring in China, with the expiry of a more than decade-long programme of subsidies for EV purchases (alongside the end of tax cuts on combustion-engine cars) in addition to the unusually extended Lunar New Year celebrations this year eroding sales of new cars in January. “There has been persistent weakness in China,” according to Jordan Roberts, a lithium analyst at Fastmarkets. “The market is waiting to see the impact from the reduced new energy vehicle subsidies and is concerned by low household confidence, which is tied to the country’s property crisis.”
By enabling price parity with conventional cars with internal combustion engines, these subsidies were crucial in spurring a national shift to EVs over the last couple of years, during which the EV market in China experienced phenomenal growth. But following the massive 90-percent growth recorded in 2022, sales of new-energy cars that include pure battery EVs and plug-in hybrids fell in January by 6.3 percent year-on-year to 408,000 units, the China Passenger Car Association (CPCA) confirmed. And with no evidence of the subsidies being renewed, analysts are now expecting EV sales in China to remain lacklustre throughout 2023, further adding to the lithium market’s increasingly bearish mood.
“New EVs will be less supportive of sales growth this year. Apart from the announced renewal of the vehicle purchase tax exemption policy for new energy vehicles (5% tax exemption is around CNY10000), there has been no indication that there will be a renewal of the cash subsidies on EVs,” Dutch bank ING noted in late February. “The fiscal burden has risen, and the government may not want to spend on subsidies to boost consumption when the economy is recovering. After the fiscal-driven spike over the past few years, EV sales will slow.”
Abhishek Murali, EV analyst at consultancy Rystad Energy, meanwhile, told the Financial Times that “within the automotive industry, there is some consensus that the rapid growth observed in 2021 and 2022 may not be seen this year”.
Mid-February also saw reports emerge that the world’s biggest lithium-ion battery manufacturer, China’s CATL (Contemporary Amperex Technology Co., Limited), had begun offering discounts on batteries sold to certain Chinese EV companies, such as Nio Inc. (NIO) and Zeekr, thus reflecting the ongoing downturn in the lithium price. Such discounts are reportedly being offered to enable CATL’s customers to lock in battery purchases—the most expensive component of EVs—at below-market prices if they agree to purchase at least 80 percent of the batteries they require for their EVs from CATL, on the assumption that lithium-carbonate prices will continue falling significantly. CATL held around 37 percent of the global market share in 2022 and offered a discount of 7 percent from established prices to a Chinese EV maker in January, an unnamed source told Reuters. “It’s very much a market share game,” Caspar Rawles, chief data officer at Benchmark Mineral Intelligence, explained to Reuters. “This is, I think, in part, a price war.”
But while demand for lithium has been subdued, many believe the expanding supply outlook for the metal is mainly what is pushing prices lower this year, with a wave of fresh supply expected to come online from facilities in China, Australia and Chile. Five analyst forecasts, including ones from Bank of America (BofA), JPMorgan Chase and Morgan Stanley that were reviewed by Bloomberg in mid-January, for instance, anticipated production increases of between 22 percent and 42 percent in 2023 alone. “Supply is coming on stream faster than you can say ‘boo’. Demand remains strong, but prices have been unsustainable for some time now,” analyst Dylan Kelly of Ord Minnett recently told Mining.com.
And in a late-February report, Goldman Sachs stated that the spot price of lithium carbonate would decline to $34,000 per tonne in the next 12 months, from an average of $53,304 this past year, with a hefty 34-percent year-on-year growth in global lithium supply led by Australia and China as the chief contributing factor. “Over the next 9-12 months, we are progressively more constructive on base metals, whilst expecting a move lower in lithium prices alongside cobalt and nickel,” the commodities research report noted. “Hence, whilst a recovery in EV sales into ’23 Q2-Q3 could temporarily lift sentiment and support falling battery metal prices, the likely supply surge and downstream overcapacity are set to bring lithium prices down subsequently in the medium term.”
The global supply outlook has been further boosted since Goldman’s report by the announcement in early March of the first-ever lithium deposit to be discovered in Iran’s mountainous western province of Hamedan. At an estimated 8.5 million tonnes, the discovery would be the second-largest in the world, behind only Chile, which the United States Geological Survey (USGS) estimates to hold 9.2 million tonnes. It would also represent around 10 percent of the world’s total proven deposits. “For the first time in Iran, a lithium reserve has been discovered in Hamedan,” Mohammad Hadi Ahmadi, an official at Iran’s Ministry of Industry, Mine and Trade, was quoted as saying on Iranian television.
China is also expanding its lithium-supply capacity from lepidolite, which, while considered the most abundant lithium-bearing mineral, is deemed an inferior source of lithium due to its higher cost of extraction as well as the higher emissions levels associated with its mining. But according to UBS, lepidolite will provide 280,000 tonnes of lithium for China in 2025, equivalent to 13 percent of the global lithium supply, compared with the 88,000 tonnes it furnished last year.
But not everyone is in lockstep that a further significant selloff in lithium is guaranteed. Perhaps most notably, the world’s top lithium producer, Albemarle, is maintaining its bullish view on lithium prices and EV sales, attributing January’s decline in China’s car sales to temporary Lunar New Year weakness and predicting that China’s EV market will grow by a hefty 40 percent this year, equivalent to three million more vehicles. “As China reopens, we expect moderation in EV demand to be short-lived with medium and long-term demand remaining robust,” Albemarle’s chief executive officer, J. Kent Masters, recently confirmed.
And while substantial new sources of supply may come online eventually, some analysts do not see this having a sustained impact on prices in 2023. Scotiabank (Bank of Nova Scotia), for instance, believes the recent selloff in lithium equities has been largely unjustified for this reason. “While the year ahead has a slight chance to see temporary softness in lithium spot prices, beyond 2024, we are stumped as to where supply will come from to satisfy demand,” it recently noted, as quoted by the Financial Times. And Trafigura recently echoed this sentiment. “I really don’t think there’s any reason to believe that so many tons can magically appear this year to return the market to balance,” Claire Blanchelande, a lithium trader at the commodities trading firm, told Bloomberg in January. “The pain is not over yet.”