My Take: Lithium in 2020

Although I have called the 2020’s “The Lithium Decade”, I anticipated a slow start in the first year of the new decade and have said more than once on Linked In and the Global Lithium Podcast that I felt the industry needs an “enema” in 2020 to remove the “toxin” of excess spodumene inventory and allow Tier One battery suppliers (other than Panasonic) time to be able to produce adequate volumes of high capacity battery cells. Mercedes, Audi and other car makers can’t meet existing EV orders due to the lack of high end battery cells. That situation has NOTHING to do with a lack of BQ lithium hydroxide. The next BQ lithium chemical shortage isn’t far off but certainly isn’t here yet.

Most of the attention from those commenting on lithium remains on China’s EV market and the policies the government puts in place to incentivize demand. Subsidy cuts in 2019 brought China EV growth to a screeching halt at the same time new spodumene producers in Oz were shipping large volumes to Chinese off-takers that in some cases didn’t have chemical conversion capacity. A self-inflicted wound by certain newcomers to the lithium industry that didn’t seem to notice what their neighbors were doing.

The expected rapid transition to “high nickel” NMC cathode in China caused an imbalance of hydroxide capacity additions and sub-optimal capital allocation by lithium producers. LFP remains an important cathode in China. For the foreseeable future, the move to NMC in China will likely stay within the realm of those blends that can use either carbonate or hydroxide.

Fortunately, with the success of Tesla, hydroxide demand for NCA in Japan is showing robust growth. Hydroxide demand is also growing rapidly in Korea despite the current struggle to make consistent 811 NMC. The current alternative is a bit lower percentage nickel but still producing a product that requires hydroxide as the lithium feedstock.

Despite the growth of hydroxide in Japan and Korea the continued strength of carbonate based cathode in China is good news for South American brine producers who sit at the low end of the lithium carbonate cost curve.

Like many industries experiencing or anticipating high growth, both the lithium and EV markets experienced bumps in the road in 2019 that spilled into 2020.

And then the Coronavirus appeared…………

I spent a significant amount of time in China during SARs, traveled with a digital thermometer to know if I would have a screening problem at the airport and, just in case, learned how to deftly avoid airport temperature scans. Fortunately, that is no longer possible.

I lived in China during the Avian flu when passengers were not allowed to deplane until several people in HAZMAT suits came on the plane and took everyone’s temperature. It was like a lottery. If anyone within 3 rows of you had an elevated temperature, you won a trip to a quarantine hotel that lasted either one or seven days depending the test results. Never happened to me but it did happen to my daughter’s boyfriend and the mayor of New Orleans. The boyfriend was in for one day but Mayor Ray Nagin got the seven-day version. And yes I am digressing…..

At a minimum the Coronavirus is extending the long Lunar New Year holiday by weeks. The economic impact may be “months”. I spoke to more than one China lithium operation in the past 24 hours. It seems early March is the current target for a return to a “reasonable” level of production but like many targets in a situation with several “moving parts” the current timetable is likely to slip. One friend that has a senior management role at a lithium chemical conversion plant said: “I am fine but got trapped in Wuhan”. A classic case of “going nowhere fast”. 

In many cases workers that traveled hundreds of kilometers to visit home for the holiday have not been able to return.

Despite being what is considered a "disappointing" year lithium demand grew more than 35K MT in 2019 off a base of ~270K MT. The expectation going into 2020 were positive.

It is too early to know the extent of the impact the virus will have on the global lithium and battery markets but there is no doubt it will dampen demand in 2020. For now, I am projecting a modest impact that lowers global demand no more than 10 to 15K MT LCE off my projected 2020 demand number of 350K MT LCE. More on that in late March.

Why a limited impact?

If there is a silver lining to the “viral cloud”, it could lie in China’s need to stimulate the economy after this economic shock. I look for incentives to be put in place that create EV and battery demand which obviously will spur lithium demand. From my perspective 2020 is still negatively impacted overall but 2021 may be stronger than it would have otherwise been. It seems to me the leadership in Beijing will need a major “win” after a combination of the “revolt to the south” plus the the virus and will adjust policy to restore/spur economic growth and confidence.

The problems in China will likely have at least a short term impact on the anticipated EV growth in Europe but will also clearly demonstrate a need to accelerate the creation of a supply chain in Europe that is not overly reliant on distant sources. Think Tesla and their move toward global EV & battery operations.

Despite having a new plant in Shanghai, I think Tesla comes through the virus situation relatively unscathed. According to Elon Musk on a recent podcast, the Shanghai plant is using Panasonic cells produced in Nevada. Supply from LG will be next and later CATL if they get their act together. Unless something unforeseen happens, Tesla should not lose too much production. You can hear the podcast with Elon Musk here: https://podcasts.apple.com/us/podcast/third-row-tesla-podcast/id1489410813?i=1000465059948 His comments around minute 42 support my comments on cell quality and the need to use Panasonic cells in Tesla's Shanghai plant.

Clearly the slowdown in China is more bad news for WA spodumene operations. Lower lithium chemical production in China will lengthen the current malaise and extend the capacity cutbacks. More on this point in a future post once the timing of a return to normalcy is better known. In any case with the current level of spodumene inventory in China, this year is about survival for non integrated WA spodumene mines.

I have always said the “Big Four” lithium players will be fine no matter what happens in the market. Tianqi, with their high debt load, may put my theory to the test but I will stick to my opinion despite the storm clouds over the Chengdu based producer.

Albemarle has a significant decision to make given Luke Kissam is retiring for health reasons. Clearly there is no credible successor from within the ranks. Hopefully the ALB board brings in a change agent with some technical knowledge and the wisdom to adjust a flawed commercial long term contract strategy. You have to ask yourself why Ganfeng exports hydroxide from China to Japan and Korea with a price almost $4,000/MT higher on average than ALB. If that is what passes for long term strategy, clearly the person currently running the Albemarle lithium business isn’t somebody I would want to promote to corporate CEO. We aren’t talking about small numbers either. ALB exported more than 20K MT of LiOH from China last year.

Ganfeng continues to avoid the missteps made by their peers. Their recently announced deal with Lithium Americas gives them majority ownership of the Minera Exar JV and benefitted both Ganfeng and Lithium Americas. If you want to hear more about that deal you can listen to Jon Evans, CEO of LAC and Cormark analyst Mac Whale discuss the deal on the Global Lithium Podcast here: https://anchor.fm/globallithium/episodes/QA-Ganfeng---LAC--Luke--Tesla--Coronavirus-ean9ot

The final “Big Four” question mark is SQM. How much will they be able to produce and when is still uncertain. The success of SQM is a matter of degrees. Worst case scenario they still produce a significant volume and ride their low cost position to high profits when the inevitable price spike comes. My opinion is they still don’t produce over 100K MT by 2023 and they continue to struggle with their limited percentage of battery quality. That said they will still earn significant profits. I also believe SQM will ultimately part ways with Wesfarmers in Australia. Wesfarmers is much larger than SQM, they are on their home turf in WA and are not going to be the weak, silent partner Kidman was. SQM has never been great at partnering and this is probably more likely to be true here when they are the smaller partner on an unfamiliar continent.

As for the next tier: Livent is “reevaluating” their expansion plans (what else is new?) and struggling for hydroxide share in Asia. Orocobre is hoping a hydroxide plant in Japan can be a "value added" home for their less than battery quality carbonate.

Lithium Americas, with partner Ganfeng at Cauchari, and their wholly owned Thacker Pass project in the US is the clear favorite among the juniors to become a major in the next five years.

Given the environmental, water and political issues in Chile there will be a greater need for more brine based production from alternatives (read Argentina). Neolithium at 3Qs, along with Galaxy & Posco at Hombre Muerto represent the "best of the brine rest".

As I was typing this, Altura issued an announcement that gives the impression they have turned a corner with a loan extension while the reality is that the required equity raise is far from certain. A trading halt continues in the "merry old land of Oz".

We are just over a month into the “lithium decade”. The ride in 2020 will continue to be bumpy. I am confident that the long term future is bright for lithium. My simple advice: DYOR and buy quality assets.

Stay tuned….