Lithium Update: of Battery Grade, Bill Clinton & What's Next

When my career began there were exactly two companies producing lithium chemicals in the western world. Life in lithium was quite simple in the 1990s. Very few people cared about the lightest metal unless they had a manic depressive relative. The major industries we sold upstream lithium chemicals to (glass, grease, and aluminum) had stable, predictable demand. Most of the time, I had a low stress job. During my first decade in the lithium world, we had one new entrant, SQM, which caused a short period of angst and volatility as their volumes were “accommodated” in the slow growing market. 

Although the lithium ion battery was commercialized in the early 1990s, the volumes were relatively insignificant for the first few years. Initially Japan was the only producer of “LIB cathode”. FMC, along with their Japanese partner, had virtually 100% of supply for the first few years. Demand in 1998 (see chart below) for LCEs going into cathode was less than 1,600 MT. By 2017, battery demand had grown to well over 100,000 MT.

I began traveling to Japan every six weeks in the second half of 1995. At the time I was “global product manager” for FMC’s lithium carbonate and hydroxide product lines. Back then, FMC was still producing lithium chemicals from hard rock mined in North Carolina. FMC had two lithium carbonate production lines – one was a batch process, the other continuous. Only the product from the batch process was qualified by Sony, Panasonic aka Matsushita and later Toshiba and others. In the early days Nichia (Sanyo) purchased high purity lithium hydroxide and paid a large premium. After about a year they figured out they could make lithium cobalt oxide from carbonate without a problem.

Why the history lesson? Please indulge me for another couple of minutes.

During my first major price negotiation in Japan in the fall of 1995, I learned that future battery demand was forecast to exceed FMC’s limited “batch process” capacity within a year or two. I urged our customers to qualify product from FMC’s “continuous process” but told them the only choice I had in the interim was to raise the price to “help incentivize qualification”. My comments were met with stone faced silence and then a request for a short break.

Although I no longer use the term “battery grade” (now preferring “battery quality” which I have explained in multiple posts and on the Global Lithium Podcast), I coined the term “battery grade” that day. After my Japanese friends plotted their rebuttal strategy during the short break, I explained (read: created the narrative) that the product from our batch line was “battery grade” and had the product number 449. Our “industrial grade” from the continuous circuit had a product number 400. “So Lowry san you are saying ‘yon yon kyuu’ (449 in Japanese) is now ‘battery grade’?” I responded: “That is exactly what I am saying and unfortunately we are going to have to double the price” to provide incentive for the customers to qualify our other product as “battery grade”. The response was a short sentence delivered in loud Japanese accented English (I spoke no Japanese at the time except “green tea ice cream”): “Lowry san you sound like Bill Clinton; this is unacceptable”. I was not immediately certain how the POTUS got dragged into our price discussion but the displeasure on the other side of table was clear. I was another gaijin that had gone off the rails.

For context – the Japanese companies producing lithium cobalt oxide had tested FMC material from both production lines and Foote’s (now ALB) material from both Chile and Silver Peak, Nevada as well as Chinese material from Xinjiang. All parties chose FMC’s 449 grade, which was unfortunate for them since they had selected a material that was going to disappear in 1997 when FMC started up brine production in Argentina and closed their mine in North Carolina. It fell on me to “encourage a speedy transition”.

FMC’s 449 was selected for a number of reasons including the impurity profile and the natural particle size – micronizing material and magnets at various stages of the process would come later. So the original “battery grade” was not necessarily what was desired by the likes of Sony – it was simply “best available” for the desired use. The long digression and short history lesson is over but you can see that I am very familiar with the spurious origins of the term “battery grade”.

Fast forward to the present - there are still only six companies around the world producing significant quantities of lithium chemicals from resources they either wholly own or have a significant interest in. Yet as I write this there are over 300 companies globally with “lithium” as part of their name - vying for investment capital and probing the limits of credulity in how they present their projects and potential for return on investment. Lithium projects are not easy to finance or bring online.

Clearly, over the past few years, the lithium market has gotten a significant amount of attention. In fact, probably too much. The small number of people who have been in the industry for decades tend to react with a bemused shrug to all the attention and commentary from newly minted lithium “bulls” as well as the widely divergent opinions of “big bank” analysts on the future of lithium supply, demand and pricing. Perhaps I am the Don Quixote of lithium - foolish enough to spend time trying to debunk bad information and analysis. Some of my long time industry friends wonder why I bother. Everybody needs a hobby so let’s proceed…….

The 300%+ price run-up that began in China in late 2015 and gradually spread to the global market caused a false euphoria among the holders of shares in both high quality and marginal lithium stocks. By early 2017 many of those with an interest in lithium but little experience (and less knowledge) could see only prosperity or an “endless lithium summer”. Others with some commodity experience but limited understanding of lithium grew cautious believing they “had seen this movie” before. Many compared their dalliance with lithium to prior affairs (profitable or otherwise) they had with iron ore, uranium and/or rare earths. By Q3 2018, the former crowd grew despondent over “crashing” prices in China and the latest news from the newly minted “Fast” Markets team. The latter group often took the “I told you so” attitude citing lithium as “the new iron ore” rather than the “new oil”.

For many, lithium, like other bright and shiny investment trinkets seemed to have quickly lost luster. Like the disciples in a biblical parable that “lacked root” they have been “blown away”.

OK – what am I trying to say? Actually it is quite simple – the long term “lithium story” is still intact, 2018 is an aberration with data points that easily led to false conclusions and panic.

On the short term negative side of the lithium equation:

China NEV growth slowed as the 2018 incentive program was finalized late, confusing the supply chain as to what type of cathode/batteries would be needed. The cathode choice drives the decision as to what type of lithium chemical (carbonate or hydroxide) to buy. Despite all the positive announcements around the world of new EV models to be released early in the next decade, investors focused on China, subsidies (or lack thereof) and other short term negatives.

The likes of Morgan Stanley, Macquarie and RBC all published some form of misguided lithium reports that caused many investors to panic. RBC called for > 67K MT of LCE in their 2018 ramp-up assumption (details can be found in my 1/12/2018 post entitled: “Lithium Past, Present, and Future”). In fact, of the 67K MT RBC projected less than 15K MT of lithium chemicals will enter the market in 2018. While the “tsunami” of lithium chemical supply from Oz hard rock converted in China didn’t happen; an increase in mostly low quality Qinghai brine caused China spot price trend down month in and month out. Rather than focusing on the fact that prices outside of China for both carbonate and hydroxide remain strong – on average above what I call the “new normal” of $12-14/kg for carbonate; investors girded their loins for Morgan Stanley’s call of a coming return to global average pricing in the mid to upper single digits. Spoiler alert: that is not going to happen. Why not? The industry cost curve will not support $7/kg lithium carbonate pricing even if spodumene prices drop substantially (30 to 40%) in the coming years. Converters have to make a profit. VAT on China exports still has to be paid. The long term price has to support continued capacity investments. 

On the positive side of the lithium equation it is pretty simple:

Electrification of transportation is clearly becoming a global phenomenon; as is energy storage (ESS) for renewables and grid management. In the coming five to seven years, lithium supply is more likely to hold back EV penetration growth than to get ahead of the market. Take the projected demand for cars in 2023, and even a 6% EV penetration with an average 40 KWH battery (low in my estimation) run through the numbers using 0.8 LCE per KWH. Or make your own assumptions – with any credible estimates you are going to get a number that will be hard for the industry to respond to – especially with battery quality materials. Add on the fact that ESS is happening faster than almost anyone thought and it becomes obvious the lithium demand story just keeps getting better.

On the supply side – expect most projects to continue to be both late and operate at less than stated capacity. As much as I respect the Atacama as a lithium resource, I believe it is nonsense to think that the two current players can achieve even a doubling of their current output by 2023. In my view, in 2023 the Atacama will not exceed 150K MT of LCE production.

Hard rock output from Oz will grow faster than conversion capacity will come online with battery quality material. The lithium chemicals “reprocessing” industry is going to grow rapidly as new (and in some cases old) producers struggle to meet battery quality specifications.

Whether you call it “Battery Grade” or “Battery Quality”; sustained oversupply and single digit pricing of the needed quality of lithium chemicals isn’t likely to happen in the next decade.

That’s my story and I’m sticking to it.

PS: As I was about to post this SQM announced an execution delay in their current expansion. It certainly appears they will produce less in 2018 than 2017. Bottom line: Lithium production is not an easy business.......