It’s been a decade of lows for commodities after posting 7 declines in 11
years, but we’ve seriously underestimated lithium. It’s back with a vengeance
in 2019.
The commodities market endured yet another annus horribilis, with
just four commodities—natural gas, uranium, cocoa and wheat—recording any
uptick at all. Last year’s 12 percent slide by the Bloomberg Commodity Index--spurred
by 20 percent-plus declines by industrial bellwethers like West Texas
Intermediate crude, steel and platinum—came in the wake of two years of
modest gains.
Viewed against that kind of backdrop, lithium’s 50 percent correction that
snapped a multi-year winning streak appears less vicious. It’s important to
remember that prior to the crash, lithium had enjoyed a meteoric rise with
prices doubling since the beginning of 2016 and nearly quadrupling over the
past decade. The fact that much of the rally coincided with a sharp rise in
the value of the U.S. dollar makes it all the more remarkable.
Investing in the commodity market can be a roller-coaster ride; what with
the incessant boom-and-bust cycles driven by the ebb and flow in
infrastructural spending, production ramps/cutbacks and
stockpiling/destocking supplies. And just like other financial markets,
trader sentiment plays a big role in determining trajectories.
Unfortunately, it’s the latter scenario that took center-stage during last
year’s lithium crash. A furor around anticipated new supply especially from
China’s new hard-rock projects and Chilean brine mines got out whack and
derailed the market.
(Click to enlarge)
Source: Metallary
(Click to enlarge)
Source: Trading Economics
Tsunami of Oversupply?
The situation was not helped by Wall Street punters sounding the alarm
over the dangers of oversupply …
Shares of major lithium producers and explorers including Sociedad
Quimica y Minera de Chile (NYSE:SQM), Albemarle Corp.
(NYSE:ALB) and Orocobre Ltd (ASX:ORE) received a severe
hammering in March after Morgan Stanley forecast that Chilean low cost brine
producers could add as much as 200kt per year by 2025, while expansion of
China’s and Australia’s hard-rock mines could pump in another half a million
metric tonnes over the timeframe. That’s certainly a massive production
ramp-up considering that global production in 2017 totaled just over 200kt. Related:
What Happens When The Bull Market Ends?
In August, Macquarie Research provided the final straw after chiming in
with a warning that the market was “sleepwalking into a tsunami of
oversupply.”
The report put the final nail in the coffin of the decade-long lithium
rally-- Fastmarkets reckons that prices for battery-grade lithium carbonate
in China, by far the world’s largest consumer of high-grade lithium
carbonate, tumbled 50.31 percent last year to 75,000-83,000 ($10,885-12,046)
yuan per tonne from 158,000-160,000 ($22,932-23,222) yuan per tonne the
previous year, as demand waned.
(Click to enlarge)
Source: Metal Bulletin
But maybe the bear camp rushed their fences this time…
While it’s undeniable that the carnage managed to exceed even Morgan
Stanley’s decidedly pessimistic outlook for global lithium prices to drop 45
percent by 2021, the fundamentals suggest that the selloff was greatly
overdone and such low prices cannot be justified by simple market forces of
supply and demand.
According to London-based Benchmark
Minerals Intelligence senior analyst Andrew Miller, the disconnect
between lithium prices and the demand side of the equation has never been
bigger.
Reality Check
A cross-section of materials experts have raised eyebrows at the negative
assessment, criticizing the investment analysts for underestimating the rise
in lithium demand and the complex nature of lithium mining and production
ramps. According to them, both MS and Macquarie failed to account for just
how big the gap between supply forecast and actual production can be.
And, they might be spot on.
Related:
Americans Are Not Ready For A Recession
Supply expansions in 2018 came in much lower than predicted and the
tsunami of oversupply forecast by the likes of Macquarie Research proved to
be little more than changing tides in the lithium supply chain.
A good case in point is Brisbane-based Orocobre, which has become the
poster child for just how challenging new brine mining can be. The company’s
Salar de Olaroz project in Argentina took seven years to hit its stride but
still came up short of production targets. Meanwhile, run-ins with the courts
and regulators coupled with mutual accusations of license violations facing
Chile’s lithium giants SQM and Albemarle at their Atacama brine projects
further reinforce this point.
The screenshot below from Orocobre’s investor slide presentation is a
sobering reminder to this reality.
(Click to enlarge)
Source: Mining.com
In terms of feedstock supply, SQM and Albemarle had laid out plans for
increased production rates. But as is often the case with brine evaporation,
the process has been hindered by seemingly endless production delays. SQM hit
technical obstacles at its new brine conversion facilities that delayed its
target capacity of 70,000 tpa LCE by end of 2018 while Albemarle continues to
struggle to achieve full capacity at La Negra II.
The situation has not been much better in China—the ultimate lynchpin to
the lithium bear thesis. Many Chinese brine producers in the Qinghai region
had outlined plans to triple or quadruple capacities over the coming 3-4
years. A visit by Benchmark Minerals to these operations, however, has
painted a dire picture—the technical challenges related to high magnesium
concentrations in the region are nowhere near being comprehensively overcome.
Across Qinghai’s 10 producers, only an additional 5,000-10,000 tonnes of
lithium product found its way to the market, majority of which failed to
reach technical grade specifications. This, in effect, means that much of
what came online from the region was either reprocessed thus adding to costs
or converted to lithium hydroxide in a bid to meet growing demand for
nickel-rich cathode technologies.
Although tight credit in China forced some lithium buyers to destock and
contributed to the glut, the predicted huge oversupply failed to materialize.
Around mid-September, analysts at CRU estimated lithium
surplus for 2018 at a relatively mild 22,000 tonnes against a demand of
277,000 tonnes.'
Source: Benchmark Minerals
2019: A Transition Year
So far, there is no clear data or evidence that that the lithium demand
narrative is about to slowdown, let alone reverse. On the contrary, certain
emerging trends in the industry suggest just the opposite.
The biggest near-term driver for lithium demand is the NCM trend. The
shift towards cathodes that use huge amounts of lithium hydroxide is already
underway, something that is expected to trigger a huge NCM
(nickel-cobalt-manganese) ramp up. Benchmark Minerals estimates that 44
percent of mega-and-giga-factories will use lithium as a raw material by 2028
translating into 534,000 tonnes of additional demand.
That projection seems to resonate with Elon Musk’s ambitious target to
build 20 gigafactories across the globe over the next decade. Miller sees
2019 as the tipping point where demand will eventually outstrip supply
starting 2020.
Meanwhile, Roskill has predicted that the shift to higher-nickel-cathode
materials will push many lithium producers to favor production of lithium
hydroxide over lithium carbonate thus taking some pressure off the lithium
carbonate supply side. The firm has forecast lithium demand to expand by a
brisk 21 percent annual clip between 2018 and 2025 with demand expected to
grow 13.5 percent in the current year.
But, of course, no lithium bull thesis would be complete without the EV
angle.
Currently, the EV market accounts for about 47 percent of global lithium
demand. That, however, is expected to drastically change as EV penetration
rates coupled with the ongoing trend of electric vehicles using larger
battery packs that yield longer ranges leading to electric mobility gobbling
up 83 percent of lithium supply a by 2027.
Fastmarkets has predicted EV penetration to hit 15 percent by 2025 from 2
percent currently. EV demand has actually been beating estimates and is
constantly being revised upwards to reflect this. The EV explosion is expected
to drive a nearly six-fold increase in lithium demand for the forecast
period.
(Click to enlarge)
Source: Infinity Lithium company presentation
Key lithium trends to watch in 2019 and beyond
- Lithium carbonate prices will steady in 2019 before
picking up steam starting 2020
- Lithium hydroxide prices could soften a little bit after
remaining resilient in 2018
- China will become less important as a global price trend
driver as demand rapidly builds up in other key markets
Miller advises investors to keep an eye on new spodumene production,
particularly how quickly it can be integrated into the chemical and converter
supply chain and turned into either lithium carbonate or hydroxide. A slower
ramp is likely to lead to supply constraints and raise prices and vice-versa.
By Alex Kimani for Oilprice.com
