Lithium: Best of Times/Worst of Times?

This has been a strange year in the lithium world.

There has been a constant stream of good news about long term demand growth from the electric transportation and ESS markets. Yet, lithium stock prices have dropped precipitously largely due the constant din from the “oversupply camp” that a “tsunami of supply” from Australia was about to enter the market via China converters and crash lithium chemical prices.

In 2018 there is some level of "logic" to support either the short term “oversupply” or “tight market” view. Those who believe lithium start-ups are easy have no support from history but that belief is the cornerstone of "oversupply" thinking

However, in my opinion, the vast majority of data still supports relatively tight supply and strong lithium prices for the next few years. Strong price does not mean the highest China pricing from 2016. As long as the market is tight the price will not be cost curve driven but a result of market forces: meaning above and in certain cases, such as today, well above the cash cost of the high cost producer. If at some point in the future we move to a true, sustained oversupply situation, the lithium price will be cost curve driven but that will still not yield a return to 2015 prices as some of the big banks posit. The cost curve is moving north.

Cash costs in the Atacama have more than doubled based on the new royalty and current pricing. The high cost converter in China buying spodumene at current market pricing has cash costs for lithium carbonate and hydroxide near $10,000/MT. If the converter exports, an additional cash cost in the form of VAT must be baked into the pricing they can offer. Costs based on DSO (direct shipped ore) use ran as high as $13,000/MT. In the past week we saw a hard rock casualty as Desert Lion had to cease operations when market prices were still well above $10,000/MT.

Thus far it seems the supply “tsunami” from new projects in Oz is more like a very gentle wave peacefully lapping against the China beach causing no disruption. On the other hand, low quality brine based carbonate from Qinghai operations that have recently increased production has pushed “spot” price in China down substantially stoking the fires of the “oversupply” camp and short sellers.

The contradiction is amazing – the long term market growth prospects have never looked better, yet “short interest” in lithium stocks has probably never been higher.

"Don't think that bank research and lithium stock prices are 'the story' of the lithium industry. Usually it is just the opposite of what is really happening" - Simon Moores of Benchmark Mineral Intelligence on Episode 20 of the Global Lithium Podcast.

Confirmation bias seems to have run amuck across the industry in 2018 so I decided I needed make certain I had not fallen prey to this virulent malady. Best way to test the market, get on a plane or, in this case, several.

I recently returned from an eight day around the world trip with stops in London, Beijing, Chengdu and Tokyo before returning home to North Carolina. Normally I would spend at least twelve days on a trip like this but eight had to do this time. I met with five CEO’s of lithium companies of various sizes, visited two chemical conversion plants in China (one in operation for many years and one in the middle of construction), and caught up with three companies in Japan with significant market positions.

Like a debater preparing for competition I wanted to take and defend the position of the “oversupply camp”. In the end, I was not up to the task but I digress.

In London, I met up with my Global Lithium Podcast partner, Emily Hersh, to record three episodes from a London studio including one with Simon Moores and Andy Miller of Benchmark Mineral Intelligence and another with Financial Times writer Henry Sanderson. Interviewing knowledgeable people following the industry but with a different set of contacts than I have is a great way to supplement my knowledge base while trying to help a global audience stay current on “things lithium”.

In the discussion with Benchmark (episode 20 of the Global Lithium Podcast) you can listen at www.lithiumpodcast.com or on the Apple Podcast platform (link at the bottom of the article) we learned that from Benchmark’s perspective only two (and those are in China) of the eleven lithium prices they track are down in any meaningful way this year. Six of the prices Benchmark publishes are carbonate, four are hydroxide and they also publish a spodumene price.

My perspective on price is often criticized which is a bit ironic given what I call the “new normal” carbonate price of $12-$14/kg is well below SQM’s recently announced Q2 price which was well over $16/kg. Albemarle and FMC also cited Q2 price increases. Yes, I am well aware that the ever volatile China market is currently living through a significant dip in short term carbonate contract pricing. This drop is largely due to a significant volume of less than battery quality material from Qinghai brine producers making it to market and some aberrant behavior of converters under financial pressure cutting price to quickly move volume for needed cash.

Benchmark’s overall take on the market is pretty consistent with mine – oversupply is not imminent and prices remain in what I can the “new normal” range. Actually Benchmark’s long term price projection is slightly higher than mine.

Another salient point is that the battery supply chain often gets out of balance between raw material supply, cathode supply and cell manufacturing – more about that on a future post. Simon Moores also addresses this point a bit in this podcast remarks. To the stressed out lithium investor worrying about the lithium chemical price in China and the bloodbath in stock prices I say “this too shall pass”.

From London I headed to China to get my own update on pricing, production and demand as well as some Sichuan food washed down with the "special label" Tsingtao.

The fact is that a few days in China meeting with various stakeholders, visiting plants, etc rendered me powerless to credibly support the oversupply camp especially when taking a long term view. On the other hand, if I relied on the daily rendering of translated Chinese headlines I get from “Blackwall EV” to form my opinion; I would think the sky is falling. This is not a criticism of the Blackwall who is simply providing the headlines but sensational headlines aka clickbait aren’t intended to tell a balanced tale.

During my brief stop in Tokyo I met with three companies – none of whom expect oversupply or a price crash. Each of these companies has been involved with lithium for more than twenty years so I was not hearing the musing of those new to the sector.

Shortly after I arrived home, SQM had their investor day in NY. SQM’s supply and demand forecast is below. During their remarks, SQM pointed out how hard it is to start-up new projects and to produce battery quality. As much as I like SQM’s lithium business, I think the near term supply projection is driven by their overly optimistic estimate of their ability to move from 50K MT to 180K MT in the Atacama. However, even if the modest oversupply they show prior to 2022 in their 17% CAGR growth case and 2024 in their 15% CAGR growth case, tight markets start at 85% capacity utilization in this industry so this is not a “price crash” scenario. SQM shows the market under-supplied in 2025 based on a steepening of the demand curve.

My view of the world, at least on supply, is different than SQM’s seemingly new world view. Not sure how they chose to mention Wodgina as an “other player” and ignore Ganfeng who, in my opinion, long term will become the #1 overall lithium player in the world from lithium and solid state battery production to recycling. Perhaps that is why they SQM conveniently ignored them.

As Q4 approaches, my advice to you is stop worrying about the price in China. The battery supply chain will require huge volumes of lithium despite occasional hiccups. Again I will refer you to episode 20 of the podcast where Simon Moores renders his thoughts on the topic.

Of course, I can’t tell you when the current market pessimism will end but I consider it a blessing not a curse as it enables me to continue to buy low now and inevitably sell high in the future. Let the traders whine, rage and obsess over meaningless headlines. Compelling values abound but I am not your investment advisor.

Cheer – up: lithium’s future is bright, but growing pains are unavoidable.

The Apple ITunes podcast link: https://itunes.apple.com/us/podcast/global-lithium-podcast/id1316155766?mt=2&i=1000419307855