Appreciate the well though out discussion and agree that it does not make sense to tie up working capital if the expectation is that prices will come off further. Unwinding the position as early as possible is the sensible thing to do which puts added pressure on prices. With that said many of the longer dated, below market, contracts had well and truly run off by year end as evidenced by higher prices achieved by sqm, ake, pls etc so i dont believe the inventory was low cost. There was a sense of desperation especially across spodumene in anticipation of higher prices in 2023. You may remember pls selling on spot prices in 2022 for deliveries in early 2023. Buying at those prices with forward delivery is not something one does knowing there is a seasonal lull in q1 unless they expect pricing to remain strong or increase. That clearly didn't eventuate and if the Chinese don't have a handle on demand then who does.
China has been a black box for lithium for a long time and while ex China conversion is geowing, China will remain as a dominant player for the foreseeable. Owing to their low capital intensity, low opex, loose regulatory framework and years of expertise. Building conversion capacity elsewhere is a long, capital intensive arduous process, if the WA based converters are anything to go by. Bearing in mind the only two currently operating, Kemerton and Kwinana were built by leading and long-standing lithium chemical producers. So if they can't get it right outside of China ... who can. Albemarle has since pushed ahead with China, building additional conversion capacity at a fraction of the cost. Whether that is a sensible approach remains to be seen. So long as prices remain elevated and material difficult to come by EV makers will turn a blind eye as to where the product comes from and what the associated co2 footprint is. That won't always be the case, the whole ideology behind buying an EV is that it is an environmentally conscious decision. The co2 traceability for Chinese sourced chemicals is non-existent. Unless that changes there will be fewer and fewer ex China EV makers procuring battery materials from China longer term. This will be exacerbated by build out of Ex China conversion capacity with battery and EV makers favouring traceable, sustainable product elsewhere. This is a box Ake can tick.
JL mentioned as a mitigant to lower prices currently being reported in certain regions is that a lot of the contracted pricing arrengements reference a basket of price reporting agencies and not a single pra. Whilst this is true it is also important to remember that pricing structures, for longer term offtakes typically use a lookback period of 1/3/6 months and therefore lag the current spot price (I.e. should remain above the current spot price given they likely reference a Dec qtr 2022 basket). This should allow some to realise higher prices through q1 cy23 and I believe this is the basis for ake, sqm, alb expecting similar pricing this quarter despite prices coming off. This all washes out longer term, you lag the upswing and you lag the downswing vs spot prices.
Re China, who knows what they will achieve in terms of incremental supply from brine or lepidolite. Brine has become fairly insignificant compared to spodumene, spodumene volumes come on quicker and are much more meaningful. A 200ktpa spodumene producer is fairly small as far as spodumeme capacitt goes but in lce terms it is greater than Ake's attributed 66.5% of oz1 and oz2 combined. Spodumene converters come on fairly quickly and many Chinese spod converters were being built while spodumene was around it's lows of usd350-400/t. They ramped up just as demand for chemicals really picked up and benefited from cheap stockpiles of spodumene and dso. This changed fairly quickly as spodumene became increasingly difficult to source. Meanwhile very few plants had the capacity to upgrade technical grade carbonate to battery materials, either carbonate or hydroxide. I expect this to swing back again as margins downstream at spod converts and availability of spodumene in the past year at least has held back spodumene converter expansions outside of fully integrated producers. There has been a lot of talk about new spodumene supply and offtake contracts with EV makers, unless spodumene can find its way into a battery I'm not sure the equation is complete. Spodumene producers tout ex China offtakes with much fanfare, yet the product will inevitably pass through China before it makes its way to the EV.
Fully integrated producers are much more resilient to price swings. This is why pls, min, alb are all pushing downstream.
As I have said many times before, I am here for the expected growth in supply and have been for a very long time. If you had asked any proclaimed expert 2 years ago where prices would be today +90% of them would have said
AKE Price at posting:
$10.53 Sentiment: None Disclosure: Held
