Lithium Still Wins – Part One

Below are my thoughts on where the lithium industry is heading despite the current global economic disruption. It is still a little early to make specific projections regarding the next six to twelve months but perhaps, counterintuitively, the longer term “big picture” seems clearer to me. I can always make adjustments to the short term scenario next month in part two.

There are few situations in my lifetime that match the uncertainty created by the Corona Virus. As an American, the Cuban Missile Crisis in the early 1960s and 9/11 come to mind but in neither case was our freedom of movement restricted or economy shut down as it is today. It is hard to predict what a protracted season of “shelter in place” will do to the collective global psyche but I have some thoughts.

A few days of upward stock market price movement this week after the most significant and fastest Dow Jones drop in market history is likely just a respite before more downward movement as the virus spreads across the world leaving a wake of disruption, death and economic paralysis. It is a “blood in the streets” situation market wise which would likely lead Baron Rothschild to tell you it is the time to buy. Of course I would never give you investing advice. That said I did a nice 48 hour flip of Livent this week. Buying at 4 and selling less than two days later at $5.54. Remember the IPO price not too long ago was 17. Had I been more patient, I could have sold at $6 before the stock headed back toward five. DYOR.

Despite the current chaos, I have never been more positive about where the lithium market is ultimately headed. Two years from now I think we will see that, if anything, the virus was ironically a positive for lithium long term.

Why?

Point one - rightly or wrongly the fear and vulnerability countries around the globe are feeling about their supply chains and dependence on others is likely to accelerate a transition to greater emphasis on both supply diversification and regionalization creating more lithium chemical investment outside of China.

No, this isn’t a case of me espousing “anti globalization” or xenophobia.

Let’s call a spade a spade. The fear of China controlling the battery metals supply chain has been “out there” for a few years. The current situation is simply exacerbating the fear. Whether it is the US mostly talking rather than acting about securing stable supply of critical strategic metals or the EU trying to “catch up” with China/Asia in creating a rechargeable battery eco-system, it is clear there is growing concern around the world with respect to having diversified supply chains. Many companies frame this phenomenon as wanting at least one supply route for critical materials that “doesn’t involve China”. This doesn’t necessarily mean totally excluding China but rather is more about common sense diversification.

In the US, Executive Order 13817 dated December 20, 2017, called for “A Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals,” the Secretary of the Interior on February 16, 2018, presented a draft list of 35 mineral commodities deemed critical under the definition provided in the Executive Order. 

Lithium was on the list but little has improved regarding the US policy toward supporting lithium investment. In fact, it has probably gotten worse because the US government HAS made it clear investment from China Is NOT welcome. Exclusion of Chinese investment in the absence of concrete action to support lithium investment is, at best, unfortunate.

China tends to set a strategy and act quickly, the US tends to create draft lists, write papers and have indecisive meetings. We clearly have lost our “Manhattan Project” mojo here in America although the national unity created in battling the current virus situation may help in that regard.

Take Tesla (and don’t forget Elon is a South African import) and foreign investment by the likes of Panasonic, LG and Saft out of the equation and America has no meaningful home grown battery ecosystem. So much for the “Federal Strategy” unless it is framed: “completely rely on others”.

What does this have to do with the Corona Virus? Give me a minute.

Initially the virus that began in the Chinese city of Wuhan was considered to be a domestic China issue that might have a limited impact on Chinese exports. However, it quickly spread, gained pandemic status and became a global issue impacting worldwide pharma and auto supply chains as well as causing a significant death toll elsewhere in Asia then Europe and North America before arriving in South America.

During the month of March there has been much hand wringing in the US about why we allowed ourselves to become “hostage” to China for so many critical items. For the record, I don't blame China for bad supply chain decisions by the US.

I expect as a reaction to the virus situation we will see a more aggressive call for regionalization of many supply chains including battery metals like lithium. In the short term, the lithium world will be even more dependent on China as their lithium operations are mostly recovered from the virus while the rest of the world is early in the viral cycle.

Virus created shutdowns of countries like Argentina will result in the delay of critically needed lithium projects and expansions already in-progress (read: Cauchari & Hombre Muerto), and a further delay in financing for other projects such as NeoLithium and Piedmont. We still don’t know the extent of virus impact on operations and expansions in the Atacama.

While it is still too early to know how significant the virus impact will be on supply; in my opinion, a meaningful shortage of battery quality lithium chemicals emerges in 2021. Of course, demand will also suffer too but I believe even with a recession lithium demand will be more delayed than destroyed. Apparently Albemarle believes the same thing. 

Just this week, Albemarle published the graphs below stating that they still believe that demand will reach a million metric tons by 2025. They have also published what they believe their contribution to supplying that demand will be. The problem is Albemarle has an absolutely atrocious record expanding capacity. In my opinion they will achieve less than 50% of their stated capacity expansion by 2025 which certainly impacts the overall supply/demand scenario. Please see my Sept 2017 article on ALB's Reality Distortion Field for more on their record: https://www.dhirubhai.net/pulse/albs-reality-distortion-field-joe-lowry/

The timetable below will not be achieved.

According to my friends at Benchmark Mineral Intelligence lithium chemical supply stood at 338K MT in 2019. Most demand estimates for 2019 range between 285K MT and 310K MT. My number was 306K MT. SQM’s 307K MT. You get the picture - in aggregate there was an oversupply in 2019. Why I still say there is an “oversupply myth” is because only about 50% of that supply was tier 1 battery quality and perhaps 10 - 15% more could be used in tier 2 and tier 3 batteries. In 2019, approximately 60% of lithium demand was battery related. By 2025 the percentage of battery related lithium demand will exceed 85%.

Point 2: Lack of investment exacerbated by virus related project delays will cause total demand to outstrip supply again within two years. Battery quality materials will be short sometime in 2021. The math isn’t complicated. 

My demand forecast for 2025 is marginally lower than Albemarle’s 1,000K MT LCE and my product mix still favors carbonate marginally over hydroxide but that difference is not worth focusing on. Neither of us will be exactly correct. And to intentionally repeat myself, what I am much more certain about is that Albemarle will not be able to bring on more than half of the capacity they project with battery quality and, going forward, battery quality is all that matters. Albemarle’s struggles with project execution are well documented. Starting early in the last decade with their King’s Mountain hydroxide plant and continuing with the debacle in Chile: the LaNegra II carbonate expansion that took almost five years to ramp up.

Benchmark also shows robust growth in lithium demand and agrees with my lithium shortage thinking. Again the math only seems difficult for the analysts at Morgan Stanley. If you look at even modest EV growth and the lack on new supply coming online, shortage is a matter of when, not if, and higher prices will result.

I intentionally dollar cost off the scale of the carbonate cost curve graph below to avoid the debate about what the low cash cost of carbonate actually is - the important point isn't whether the low cost is $3500 or $3750/MT; it is the high end of the curve that sets the price when the market is behaving rationally. Of course, the high end of the cost curve will be defined by what converters in China are paying for spodumene. The current oversupply of spodumene has brought price down to an unsustainable level in the $400s/MT. My cost curve is based on a long term average price well above $500/MT which is closer to $600 delivered to conversion facilities. As long as there is a significant gap between the high cost and low cost producers, profits will be significant for those with low cost unless like Livent you throw away your carbonate cost advantage by making hydroxide with it.

Even if you disagree with ALB and assume 2025 lithium demand is only 800K MT, approximately 680K MT will need to be battery quality. The current "Big 4" lithium companies are not capable of producing that much BQ material. I have already mentioned ALB's inability to expand on schedule, SQM is struggling with the expansion of their Atacama resource - go back and read what they said about expansions each of the last three years, they have under-performed both on volume and quality. Tianqi has further delayed their hydroxide start-up in WA. Their misguided debt funded purchase of ~24% of SQM has weakened them substantially from a financial perspective. Of the top four companies only Ganfeng has managed to expand on a timely basis. Ganfeng's Vice Chairman and my old friend, Wang Xiaoshen, likes to talk about "globalization by localization". Ganfeng now has resource investments around the world. Their strategy has been validated by contracts with Tesla, VW, BMW, LG, etc. A backlash against Chinese investment/supply chain involvement will not hurt Ganfeng significantly as they have already established global partnerships and alliances such as the Minera Exar JV with Lithium Americas in Argentina. No doubt they would also fund Thacker Pass given their equity position in and relationship with Lithium Americas but US regulations prevent Ganfeng from investing in Thacker Pass.

In order to support E-transportation and ESS growth companies like Livent, Orocobre need to up their game, juniors like LAC need to execute and Galaxy needs to decide if it really wants to be in the lithium business. Unfortunately, for now, Argentina's Covoid-19 shutdown has delayed the progress of all of these companies.

In part two I will discuss in more detail how a combination of delayed projects, the desire for "China free" supply options and even 4% penetration of EVs in the next two to three years will create a BQ lithium supply shortage that will move up price significantly (think 2016 level) and finally bring in some large entities from outside China that are willing to finance projects like Lithium Americas' Thacker Pass, Neo Lithium's 3Qs and Piedmont. Europe desperately wants lithium chemical production "on the continent" even if the hard rock has to be sourced from Australia, Brazil or North America. More on that too.

The spread of this virus may ultimately be the most significant global human tragedy in our lifetime but some of the impacts may have a silver lining for lithium. Stay safe and stay home.