High Voltage: FOUR reasons the lithium market will remain in structural shortage until 2025
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Our High Voltage column wraps all the news driving ASX stocks with exposure to lithium, cobalt, graphite, nickel, rare earths, manganese, magnesium, and vanadium.
A few weeks back Goldman Sachs, and then Credit Suisse – both well respected investment banks – released reports forecasting imminent oversupply in the lithium space.
“… a prolonged phase of surplus starting this year” would cause lithium prices to plunge, they said, to around $US16,000/t LCE from $US70,000/t currently.
Lithium stocks were hammered.
In the ensuing weeks, however, industry experts and fellow investment banks have come out to counter these claims.
Among them is Benchmark Mineral Intelligence, the OG when it comes to battery metals and battery supply chain analysis.
They give four reasons why Goldman Sachs is wrong, and why the lithium market will remain in structural shortage until 2025.
Goldman sees the most “significant” new lithium supply as coming from China.
But Benchmark says known domestic Chinese spodumene and other hard rock resources are low quality – a key reason why Chinese convertors have increasingly relied on Aussie production instead.
China’s deposits of lepidolite, for example, which Goldman expects to add significant new lithium supply volumes in the coming years, have “a high waste-to-ore ratio of 20:1, subsequent high waste-disposal costs, and high processing costs, all of which make it a marginal source of lithium”.
“Associated opex and ramp up times are also commonly underestimated,” Benchmark says.
Chinese brine resources are also low quality “and have always struggled to produce meaningful volumes of lithium into the market, let alone of battery-grade quality”, Benchmark says.
“Production of lithium from China’s Qinghai province has struggled to ramp up production despite over a decade of efforts, including by electric car maker BYD,” it says.
We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the #lithium mine level potential & make an oversupply call
The speciality chemicals world is more nuanced than iron ore
It’s why the world doesn’t rely investment banks for research any more
— Simon Moores (@sdmoores) June 1, 2022
Just because a company says a project will produce 15,000 tonnes of LCE a year, doesn’t mean that it will.
Even outside of China, planning does not always equal reality, with recent efforts to build lithium processing facilities suffering from rising costs and delays, Benchmark says.
Tianqi Lithium’s Kwinana lithium hydroxide refinery in WA was announced in late 2016 and set to start at the end of 2018.
Instead, first production occurred in the second quarter of this year, with full production targeted for 2025.
“Building upstream of the EV battery supply chain takes time and rarely goes to plan,” says Simon Moores, chief executive of Benchmark.
“For Tianqi it’s been the best part of a decade.”
As demand for lithium grows, deposits with unconventional mineralogy, lower grades, and higher strip ratios will be developed, Benchmark says.
“In the last two years, higher inflation, supply chain bottlenecks and cost-blowouts have pushed incentive prices higher,” Benchmark says.
“Some new lithium supply also relies on new technologies which will add higher costs.
“As a result, it’s unlikely that lithium prices will drop back down to previous lows.”
While red hot Chinese spot prices get all the headlines, a large portion of the market is under long term fixed price contracts, and an equally significant portion is under contract with variable prices.
These prices have generally lagged spot and are still rising.
Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark’s Lithium Forecast.
“Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now,” it says.
Here’s how a basket of ASX stocks with exposure to lithium, cobalt, graphite, nickel, rare earths, magnesium, manganese, and vanadium is performing>>>
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