Understanding the Dynamics of the Lithium Market: A Comprehensive Analysis of Production Cuts and Pricing Mechanisms

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Abstract:

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This academic paper delves into the intricate relationship between lithium ore prices and lithium carbonate prices, emphasizing the heightened linkage resulting from a shift in pricing mechanisms. With a focus on the impact on lithium salt plants, the study explores how the decline in ore prices has mitigated substantial portions of price depreciation, rendering losses more manageable for these plants. The paper positions the primary pressure of the current lithium price downturn on upstream lithium ore producers, whose strategic responses play a pivotal role in shaping the supply dynamics of lithium carbonate.

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Recent production cut announcements by Australian lithium miner Core Lithium serve as a significant indicator, marking the initiation of upstream production adjustments. The analysis draws insights from the historical context of production cuts among Australian miners from 2019 to 2020, comparing the circumstances surrounding these two episodes to extrapolate insights into the potential supply disturbances characterizing the current lithium cycle. Key questions addressed include the extent of the impact of production cuts on prices, the underlying mechanisms driving this impact, and the proximity of a turning point in lithium prices.

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Introduction:

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The interplay between lithium ore prices and lithium carbonate prices has undergone a notable transformation following a shift in pricing mechanisms. This transition has led to a pronounced enhancement in their linkage, with significant implications for lithium salt plants. The decline in ore prices has emerged as a mitigating factor for a substantial portion of the price depreciation, rendering losses more manageable for these plants. Consequently, the primary pressure stemming from the current downturn in lithium prices now resides with upstream lithium ore producers, whose strategic responses play a pivotal role in shaping the supply dynamics of lithium carbonate.

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The recent announcement of production cuts by Australian lithium miner Core Lithium serves as a notable indicator, marking the onset of upstream production adjustments. This paper aims to delve into the intricacies of this lithium cycle's supply disruption by analyzing the historical context of production cuts among Australian miners from 2019 to 2020. By juxtaposing the circumstances surrounding these two episodes of production curtailments, we seek to extrapolate insights into the potential supply disturbances characterizing the current lithium cycle. Key questions addressed include the extent of the impact of production cuts on prices, the underlying mechanisms driving this impact, and the proximity of a turning point in lithium prices.

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Through a comprehensive examination of these facets, we endeavor to provide a nuanced understanding of the evolving dynamics within the lithium market and its implications for stakeholders across the value chain.

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Historical Context and Market Dynamics:

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During the period from 2015 to early 2018, lithium carbonate prices experienced a bullish trend, surging from ￥50,000/ton to ￥168,000/ton. The rise in lithium prices prompted Australian lithium miners to peak in development during 2017-2018, with projects like Mt Cattlin, Pilbara, and Mt Marion coming online. The lithium concentrate capacity in Australia increased from 1 million tons in early 2017 to approximately 2.1 million tons in 2019, marking a growth of over 100%.

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However, starting from early 2018, lithium carbonate prices began a unidirectional decline due to supply-side looseness. By the end of 2018, lithium carbonate prices plummeted to ￥79,540/ton, a decline of 51.5%. Lithium ore prices followed suit, dropping from $980/ton at the beginning of the year to $730/ton, representing a 25.5% decline. Influenced by the sustained decline in lithium prices, Australian lithium mines entered a phase of production cuts and halts by the end of 2018.

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In the fourth quarter of 2018, Wodgina lithium mine's original shareholder MRL temporarily halted DSO sales, and later, Albemarle announced the acquisition of a 60% equity stake in the Wodgina project. In the second half of 2019, Pilbara began implementing a proactive production cut and inventory reduction strategy, reducing capacity utilization to about 30%, a strategy that continued until 2020 Q2. In 2020, Mt Cattlin lithium mine's original shareholders announced a production cut, prioritizing the use of ore stockpiles for operations. The Mt Cattlin project produced 109,000 tons of lithium concentrate in 2020, a 43% decrease from 2019. In October 2020, due to the maturity of a high-interest loan issued in 2017 and the company's inability to repay, Altura went into bankruptcy administration. The project had built a lithium concentrate capacity of 220,000 tons per year before the shutdown.

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Affected by production cuts, Australian lithium mine output decreased quarterly from Q3 2019, reaching 340,000 tons in Q2 2020, a 30% decrease from Q2 2019. The growth rate of global lithium carbonate production also slowed compared to the earlier period. The projects undergoing production cuts can be roughly classified into two types: financially robust companies unwilling to sell lithium ore at low prices, proactively starting strategic production cuts; financially struggling companies, under survival pressure, are forced to cut production.

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In terms of the effect of production cuts, despite the first project announcing production cuts at the end of 2018, lithium carbonate and lithium ore prices continued to decline. In 2019, lithium carbonate prices fell by 36.8%, and lithium concentrate prices fell by 33.6%. From January 2020 to November 2020, lithium carbonate prices fell by 12.5%, and lithium concentrate prices fell by 16.5%. Starting from December 2020, due to a demand surge downstream combined with production cuts, lithium ore prices bottomed out and rebounded, marking the beginning of the well-known lithium "super cycle" from 2021 to 2022.

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Based on the progress of these production cuts and concurrent lithium price performance, several conclusions can be drawn: 1) Due to varying operational conditions among lithium mining companies, production cuts often occur asynchronously, with each mining company choosing based on its own situation. Correspondingly, the scale of production cuts is a gradually expanding process, with significant impacts on production only when major projects begin to cut production; 2) The start of production cuts is not a sufficient condition for a lithium price rebound or turning point. After the first project announced production cuts, lithium prices continued to decline for 24 months without an immediate halt to the decline; 3) Production cuts have a certain effect on lithium prices, but the effect is significantly different from the impact of demand cycle-driven fluctuations. Due to the rebound caused by production cuts, once prices rebound to a certain extent, lithium mining companies may resume production.

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Recent Developments and Emerging Trends:

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Finniss project temporarily suspended due to poor profitability

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On January 5th, Australian lithium miner Core Lithium announced that, in response to the deteriorating lithium market conditions, the company would temporarily suspend mining operations at the Grants open pit in the Finniss project but would continue to process existing ore stockpiles. At the same time, considering the difficulties of mining and construction during the rainy season and the focus on reducing expenses, early engineering work on the Northern Territory BP33 project has been suspended.

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Core Lithium is an emerging Australian lithium mining company with relatively small reserves. Its core asset is the Finniss lithium project located in the Northern Territory of Australia. The project has an ore reserve of 10.6 million tons, with a grade of 1.30% Li2O, corresponding to a Li2O resource of 142,000 tons. The Finniss project has high costs, which may be the main reason for the company's production cut. The lithium spodumene production in Finniss lithium mine project in Q1, Q2, and Q3 of 2023 was 3.6, 14.7, and 20.7 thousand tons (with SC5.35%, SC5.0%), respectively, equivalent to 0.04, 0.17, and 0.22 thousand tons of LCE. The company's guidance for the production in fiscal year 2024 is 80,000 to 90,000 tons of lithium spodumene, equivalent to about 10,000 tons of lithium carbonate, which will have minimal impact on the global supply of lithium carbonate. Meanwhile, Core Lithium stated that it would continue to process the current ore stockpile, which is sufficient to support its processing plant operations until mid-2024, so its short-term shutdown would not directly affect Australian mine supply.

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Greenbushes production cuts

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The Greenbushes mine, located in Western Australia, is one of the world's largest and highest-grade lithium deposits, providing lithium concentrates for the global battery market. However, the operator of the mine, IGO Limited, recently announced a downward adjustment in its production forecast for the current fiscal year from the initial 1.4-1.5 million tons to 1.3-1.4 million tons. This decision aligns with the company's inventory management strategy and reflects challenges in the lithium market. The production cut is 100,000 tons of lithium spodumene. If lithium ore prices continue to decline, continued production cuts cannot be ruled out. IGO, after cutting lithium mine production, also announced the shutdown of a nickel mine production project in Western Australia, indicating a pessimistic outlook for 2024.

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What are the differences in the background of this round of production cuts?

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Changes in Global Lithium Resource Supply Pattern:

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The global lithium production landscape has undergone significant transformations from 2019 to 2023, with production escalating from 77,000 tonnes to 120,000 tonnes in 2021, 140,000 tonnes in 2022, and 160,000 tonnes in 2023. While Australia, Chile, and China maintained their top positions, contributing 37.5%, 18.8%, and 11.3% of the global supply in 2023 respectively, there have been noteworthy shifts in production shares by country during this period. Australia's share notably decreased from 54.5% in 2019 to 37.5% in 2023, indicating a significant decline in its dominance as a lithium producer. Concurrently, the intensification of South American salt flats development has led to the emergence of new projects, alongside increased supply from Chinese salt lake projects and lithium mica mines, driven by Chinese investments in African projects. These changes have reshaped the cost curve of lithium resources, with production costs rising due to declining grades and increased selling prices of lithium spodumene. Nonetheless, the financial condition of lithium mining companies has markedly improved compared to the previous cycle, buoyed by the lithium carbonate price supercycle observed in 2021-2022.

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Evolution of Production Cuts:

The current round of production cuts is expected to evolve differently from previous cycles. Leading players in global major projects generally have strong financial strength, reducing the likelihood of passive production cuts. Most Australian mining companies, having experienced previous lithium price cycles, are anticipated to adopt more flexible sales strategies. However, under cost pressure, Australian lithium spodumene supply is expected to decrease to a certain extent. Despite this, "bankruptcy events" are not expected in the short term, and substantial clearance of supply-side capacity may require further waiting. The progress of new projects in South American salt flats may be affected by factors such as project approval. Additionally, political changes in Chile and bureaucratic challenges in Argentina could impact lithium supply, while African projects face delays amidst environmental and logistical challenges.

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Future Outlook:

Looking ahead, the future evolution of production cuts will depend on various factors. With leading players in global major projects possessing strong financial strength, passive production cuts are anticipated to decrease. Australian mining companies, having a comprehensive understanding of lithium price cycles, may adopt more flexible sales strategies. However, challenges remain, particularly regarding project progress in South America and the impact of political changes in Chile and bureaucratic hurdles in Argentina. African projects also face obstacles such as tightening policies and high transportation costs, while domestic lithium mica mines encounter environmental pressure. Overall, while supply disruptions may periodically affect lithium carbonate prices, a true turning point may not be imminent, and substantial clearance of supply-side capacity or unexpected demand growth may be necessary for significant market shifts.

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Summary:

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Based on our calculations, the surplus ratio of lithium carbonate this year is around 14%, and the surplus pressure is relatively high. In this context, only a price decline can complete the clearance of production capacity. In terms of demand, the new energy vehicle industry has entered a period of speed transition. Under the current high base, the growth rate of demand will gradually stabilize, and there will be no explosive growth as in 2021-2022. Upstream lithium mining companies are caught in a prisoner's dilemma, and the process of clearing production capacity may take a long time. The diversification of lithium resource suppliers also increases the difficulty of reaching a consensus among lithium mining companies, and the true turning point in lithium carbonate prices may not have arrived. Supply disruptions will periodically affect the prices of lithium carbonate futures, but in the context of oversupply, the rebound may be limited. The process of automatic clearance through price declines is slow, and supply disruptions caused by geopolitical factors are more pronounced. Only when substantial clearance of supply-side capacity reaches a certain scale or lithium carbonate demand greatly exceeds expectations can the price of lithium carbonate be expected to truly turn a corner and enter a new cycle. Each cycle has its own characteristics, and subsequent attention should be paid to the operating strategies of mining companies.