November 27 at 6:43pm · ANOTHER CHINA TRIP - PART 1
So what are the changes and how is the outlook for the future?
The last few months have been interesting. Altura Mining has signed a deal for $40M in financing and appears on track for mining in late 2017. Pilbara Minerals has signed a deal for the supply of DSO (Direct Shipping Ore) which will be pretty much a first.
Against this backdrop the word has been "shortages". Why would the Chinese buy DSO? Are they really that desperate? Well, in my opinion yes and no, So let's look at some facts and my take on it.
CURRENT SHORTAGES:
Personally I do not think we have any right now. The market for actual product requiring lithium is about in balance right now. That does not mean it will be next year but I see a few years of fairly stable supply and demand before the big ramp up. Right now China is doing the heavy lifting. They usually do ramp up more towards the end of the year but this year may be different for a few reason. Firstly, major cities like Beijing and Shanghai reached their subsidy quota's by September. That means EV's are popular but no more subsidies until 2017 for those cities. In addition some subsidies have been scaled back due to the fraud of last year and will no doubt re-emerge in a different format. Beneath all that has been the Chinese government making a concerted push to control quality. They sure as hell are not going to miss this opportunity to break the vehicle market due to a few fly by night manufacturers.
WHAT ARE PEOPLE CALLING SHORTAGES?
I like to think rightly or wrongly that I have a better handle than most after all the hours of research. However no-one has that elusive crystal ball. Still i am fairly sure my guess is correct.
So if there are no fundamental shortages why would Ruifu be wanting to buy DSO from Pilbara Minerals? I have met both PLS partners in Ruifu and GLC and both are processors. What we need to understand is that the basis for shortages is what I mentioned many months ago. It's a matter of supply chain shortages, not a real shortage of lithium.
WHAT'S BEHIND THE SUPPLY CHAIN SHORTAGES.
So let's look at it this way. The supply chain consists of the following groups from top to bottom... EV manufacturers, battery manufacturers and chemical processors.
The bottom of the chain is the chemical processors. They are smaller companies that started many years ago. Most began when the CCP began privatizing industry and most came from state owned chemical companies. They tend to be smaller, less liquid and less sophisticated.
Above them we have the battery companies and they are both friend and enemy to the processors. In China the supply chain is always about the most efficient path and that is why they are able to continually trim prices. Battery companies are looking to do just that and so they are the biggest threat to the processors. In fact I think we will see some very interesting maneuvering between the two groups. The battery companies are intellectual, more sophisticated, more liquid and dare I say it, probably more trustworthy.
Above them again are the EV manufacturers. They are largely out of the supply chain picture right at this point.
THE SUPPLY CHAIN FIGHT
So here we have the reason why shortages are being mentioned in my opinion.
The processors need supply certainty. They think if they have the supply they will get the work. If the don't then they will be forced into a contractor role. The battery companies on the other hand want to trim costs by going directly to the mines. They will then either contract out the processing or develop their own plants.
This puts the processors in a more precarious position. They are not as financial and their industry feels suddenly under attack. My guess is some will be bought out, some will merge with battery companies and some will become contractors forced into a low pricing regime.
So, the supply shortages mentioned I believe are mostly about supply chain surety. When I first mentioned it, it was that the lack of calculation for this in supply/demand figures meant that almost all analysts were wrong. I huge amount of product is going to be tied up in EXCESS of what's actually needed, long before we reach the point where the dam wall breaks.
PLS Price at posting:
53.0¢ Sentiment: Buy Disclosure: Held
(20min delay)