Lithium 2019: Parting Shots

In the past, I have written my “stream of consciousness” year end “parting shots” post with a time limit – normally 45 minutes but, as they say, desperate times call for desperate measures. Given the state of the industry, for better or worse, I am allowing myself 70 minutes this year. The 2010 re-mastered version of “Mind Games” by John Lennon is playing loudly on repeat. So with that preamble, let’s get to it.

The end of the year (and in this case, the decade) is generally a time to take stock of the past twelve months before taking a look at the future. I said much of what I wanted to communicate about 2019 in my last post entitled: ”Lithium’s Gap Year?” and recent podcasts where I didn’t call a lithium market “bottom” but said I thought we were close. I was in pretty good company thinking the industry was nearing a price and market sentiment bottom. In November Goldman Sachs issued a report echoing most of the key points made in my "Gap Year" post. Unfortunately, it seems Goldman Sachs and yours truly were both a bit premature.

What changed my thinking?

My recent trip to Asia and subsequent phone and email interactions with both cathode/battery and industrial customers around the world. It is clear that price did NOT bottom in November.

Two key factors are: 1) the near crisis financial situation in China and 2) SQM’s recent willingness to sell large quantities in China at very low prices which seems to have pulled ALB into the fray.

I remember Anthony Tse talking about the impact of the China financial situation on the lithium markets months ago. I should have paid better attention. In the interest of time, I am not going to get into the details, Google will yield readers interested in details many articles on the topic but the bottom line is that some lithium chemical converters in China, desperate for cash, are currently selling below their cost. The situation is unsustainable but is triggering another move down in carbonate and hydroxide prices both in and out of China as these companies aggressively move product anywhere they can.

SQM keeps talking about “regaining share”. That isn’t going to happen given their much less than announced expansion results and the magnitude of demand growth but they can and are chasing volume via price in China. As they have done on two other occasions since they began producing lithium in the 1990s, the new top management of the company has gone to their commodity playbook. While claiming they are “building inventory” and “showing market discipline” they are actually doing just the opposite - chasing volume in China by cutting price which has ALWAYS enticed their Atacama neighbor to do the same. The short term benefits for SQM are to the longer term detriment of the industry (and ultimately SQM too) exacerbating negative sentiment, forcing the hand of financially weak Chinese producers to further drive price in China down and enabling the “price virus” to spread further than it would have otherwise. I have written about the price virus before. The last time it was stratospheric China pricing in 2016, this time the price virus is SQM morphing into the lithium version of Wal-Mart (“nobody beats our prices”). According to a Reuter’s report, as of this week, they also have had a negative environmental ruling that could adversely impact their production and future expansions. More "Drama in the Atacama"

As of Q4, there is grease grade hydroxide from China and Russia pushing prices down below $9 in markets around the world.

In Korea and Japan contract prices for 2020 for battery quality lithium carbonate look to begin between $9 and $10/kg. Only undisciplined behavior by SQM and ALB is likely to change this range in the short term. Low prices from non integrated converters are not sustainable below this level even with plummeting spodumene prices.

And, in China, the November Chilean export statistics show SQM selling carbonate below $6/kg and ALB selling a portion of their China volume even lower than that. For those with limited historical perspective – this is pretty much textbook behavior from SQM and ALB when the markets soften. Each party will, when pressed, cite the “lack of discipline” of the other company. 

What does this mean?

Clearly non integrated lithium chemical producers will not be able to sustain single digit pricing outside China for long. Where the “bottom” settles will largely be determined by SQM and Albemarle – both of whom have the long term objective of getting price up but a short term bias to move all the volume they can.

Trying to isolate low pricing to a single market rarely works for long. Price in Korea and Japan are already taking another step down as the two members of the Big 4 based outside of China play a fool’s game with price. Long gone is the notion that ALB had viable price floors (I won’t say I told you so). So much for the lithium oligopoly……

So when does the bottom come? I still say price will start to rise within 9 to 15 months, although it is probably the latter time frame. Global demand growth even in a poor year for EV sales in China still was in the 40K MT LCE range in 2019. Pretty strong off a 2018 base of ~270K MT. Next year should see growth of 50 to 60K MT and this is before the EV demand “hockey stick” which likely begins in 2022 or 2023. Supply growth from South America brine producers will be less than 15K MT in 2020, battery quality lithium chemical inventories aren’t nearly as high as some would like you to believe despite the bloated spodumene concentrate and residual DSO inventories in China. Another WA mine on C&M happens by Q2 of 2020 and delayed projects won't be rushed to market. Next year may be called the “Year of the Lithium Enema” flushing out a “constipated” market. 

The bottom comes even lower than I expected likely in the first half of 2020 and by sometime in 2021 there is another spot price panic when orders for 2022 batteries begin and the realization that excess spodumene concentrate did not turn in to a similar excess of excess battery quality chemical production due to lack of BQ capacity and a spike in demand. The same “lemming like” rush by cathode makers to rebuild their limited inventories and buy “before price goes up next week” that happened in 2016 will cause another “spot price” spike sometime in 2021.

In 2020, ALB will again screw up on contracts by locking in low prices at exactly the wrong time and SQM will also go too far out committing to the low prices they created by short term thinking. History simply repeats itself on a roughly five-year cycle.

Ganfeng benefits by being shrewder overall than their competitors in how they contract. Cauchari starts up in 2021 as prices rise benefiting both Ganfeng and Lithium Americas.

Livent suffers as they are still sourcing carbonate for feedstock to meet their hydroxide commitments based on the late timing of their expansion in Argentina and a narrowing hydroxide premium.

I haven’t forgotten Tianqi. They will benefit when prices ultimately rise in China but 2020 will be another rocky year as their hydroxide operation in WA ramps slowly exacerbating the damage of the cost overruns and the sad story of their interest burden for their misbegotten acquisition of SQM shares.

The 2020s will be "the decade of lithium" but the first year of the decade is going to be ugly.

This year end post has never been intended to be comprehensive. It is simply my thoughts on this year and next as they come. I am not sure “Mind Games” was a great choice of musical inspiration but then again it does seem apropos for the lithium market.

I didn’t even take the allotted time of 70 minutes.

PS: I want to thank everyone who has read my Linked-In posts and listened to both podcasts. When I started Global Lithium back at the end of 2012, I had 14 followers on Linked In. As of the this morning I have 9,999. Linked In has been a great forum for me.

The Global Lithium Podcast likely ends at the current 54 episodes. As it stands, no new episodes are planned or likely but the existing catalog is a great industry primer. I never say never but with the popularity of the shorter podcast and ease of production it seems a better place to focus. I do contemplate doing an occasional longer format podcast "Global Lithium Presents" where I talk with expert guests without the music, sound effects and excess banter. If you have a thought on podcasts, drop me a message.

My next episode of the Q&A podcast will be out early next week.