Although I am a believer that lithium has a bright future that will play out over the next decade, 2019 has been a tough year for all stakeholders in the industry. Lithium prices are well off their “nose bleed” highs, sentiment on the sector has plummeted and investment in lithium projects has dried up with few exceptions. How should we think about this year in lithium? “The pause that refreshes”? “The calm before the storm”? “Normal Growing Pains”? I like to think of it as a uniquely lithium “Gap Year”.
Many high school and college seniors facing a transition to the next phase of life with a bit of fear or uncertainty delay the inevitable move by taking either a planned or unplanned “gap year” to travel or “find themselves” etc, etc. I am not criticizing the concept, sometimes it probably makes sense whether parents like it or not.
From my perspective in 2019 the lithium world needed a collective gap year of its own, hopefully to gather itself before “growing up”. Unfortunately: the gap year, like a school year, will probably spill over into 2020.
Bad analogy? Maybe, but I am forging ahead with it anyway.
The Lithium Market went into an “irrational exuberance” phase after the price run up that began in Q4 2015 and continued for almost two years before lithium prices started a steep decline that started an extended period of pessimism. To be clear, let me point out something often forgotten. As of today, battery quality lithium chemicals still sell for almost double what they sold for in September, 2015. Newbies to the industry see only a price crash while those with experience understand that prices today for BQ product are still well above (read double) prices seen before the “price panic of late 2015”.
What has happened since 2016 (below) is what people focus on but in September of 2015 BQ lithium carbonate sold for mid single digits.
Market caps of juniors with either precursor (spodumene concentrate) production or no production at all went to frothy levels. In 2016, nobody seemed to care that EV demand would take several years to become truly significant.
Albemarle was seen by many major US investors as the only way to “play lithium”. ALB earnings calls were Luke Kissam’s chance to take a quarterly “victory lap” while lapdog analysts failed to ask even the most obvious “tough” questions. Unfortunately for ALB shareholders, prices dropped, sentiment turned and the stock price headed south.
It is important to understand that although Albemarle purchased a historic “Big 3” lithium company in Rockwood, ALB gutted the management in place and is really run by the least competent and experienced management among the current “Big 4” lithium companies. ALB for all intents and purposes is a company with two great assets and a management that has gone from one blunder to the next from a sales contracting strategy that ensured they got the lowest pricing for battery quality in the industry to probably the worst acquisition in lithium history in their overpriced purchase of Wodgina. Perhaps a year off to “find themselves” would do the ALB C-Suite a world of good. Well, in this case, maybe not.
Tianqi has also had some “growing pains”. The purchase of almost a quarter of SQM at a premium while gaining no power over key decisions or strategy and providing no access to SQM product hardly seems like a great use of debt they are now choking on. Never a top hydroxide player their ambition to build the world’s biggest hydroxide plant in a very high cost area outside of China has come home to roost with a dialing back of their 48K MT ambition (or at least the timing) and an amazing increase in project capital from A$398 to A$770 (ouch!).
A few years back Livent (formerly FMC Lithium) announced an ill founded hydroxide centric strategy predicated on building new assets in China and using virtually 100% of their carbonate capacity as feedstock - forcing them to pay a high VAT penalty to export from China. Fortunately, Livent’s newest hydroxide expansion will be in North Carolina. Unfortunately, they are becoming a one product supplier to the battery market which likely will view them as a limited raw material capacity, boutique option. Their hydroxide strategy is predicated on the assumption that they can differentiate their product in what is about to become the most competitive segment of the market. The fact that they are currently the world’s low cost carbonate producer keeps them in the game despite having to use a lithium chemical as feedstock when their major competitors use the hard rock process that does not require the higher cost (carbonate) feedstock. I have written extensively about the issues with Livent’s strategy so I won’t belabor it here. Even with the expansion in Argentina they will still be a minor player in the market and may be able to pull off their “all the eggs in one basket” strategy but in my opinion if they were acquired the strategy would change quickly. A gap year to reconsider their current path might benefit Livent and their shareholders.
After a change at the top SQM seems to be returning to their old ways of total self-absorption talking about “restoring their share” while it is clear that the market is growing to a size where keeping their share is not possible even when they double (or more) their output. As they did when they entered the market in the late 1990s and attempted again approximately a decade ago, they are trying to use the way they talk about the market and price as a competitive weapon to discourage investment in junior projects.
One thing has changed. SQM no longer views lithium as a by-product so they have even more to lose than in the past with their curious market behavior. No other lithium producer currently has as wide a band from high to low price as SQM. A part of the price issue is getting rid of low quality product but part of it is a return to their “Iodine Strategy”. I will leave it to you to investigate that concept but trust me it won’t work in lithium as it didn’t the first time they tried it more than two decades ago. I have no doubt SQM management would benefit from a reflective gap year. I still say SQM quarterly average price with sales to China factored out, which is a new wrinkle in the equation, is the best way to judge the direction of global (ex China) price.
Ganfeng seems to be the lone key player that avoided the need for a gap year. They have moved ahead without making a major gaff like most of their competitors and remained focused on growing the “Ganfeng Ecosystem” both in and out of China.
A second group in need of a time of reflection provided by a gap year are the car companies announcing billions in commitments to electric vehicles while giving only lip service to ensuring the supply lithium that will enable their electric future. Companies like Volkswagen are ensuring a future “gap year” by ignoring that their “EV dreams” are dependent on a large stable supply of the lightest metal.
Don't you think VW should have thought about this a little bit earlier? Adequate lithium supply is going to be hard to "demand" from the German government.
I would respectfully suggest many of those writing about the industry take a gap year to study the market. When you see newly lithium minted pundits that change their “favorites” on a regular basis it should give you pause.
I fully expect the “Big 4” lithium companies to prosper in the next decade. Success will be a matter of degree but the future of the lithium demand ensures they will prosper unless they do something cataclysmically stupid.
Livent’s future is far from certain but I am pulling for them and am an investor (at approximately a third of the IPO price on average). Juniors with strong partners and quality assets (think Lithium Americas) should also prosper.
Finally, I am proposing a gap year for myself, after I speak to the ALB earnings call and commentary tomorrow, I intend to write less about ALB and Luke. I also plan to stop talking about Morgan Stanley, well maybe not entirely. You will hear fewer Global Lithium Podcast episodes in the final season of 2020 but more of the short Q & A podcast
