Hi EDTD,
Part 3 - here are my thoughts about what is 'evident from discussions'.
You: ‘… Why would you say it seems odd, when the announcement clearly states that "It is evident from discussions … that there is an emerging need for lithium chemical companies to be able to efficiently switch between production of lithium carbonate and lithium hydroxide…”
Me: LOH-Max already needed switch-ability to create batches of different specification hydroxide required to serve a range of hydroxide buyers. Something like "Next customer, clean the pipes, new settings, new batch production". As I understand it ‘switching’ based on customer
specification is not new to LPD. Switching for customer specification is an engineering challenge.
What we know from yesterdays is that downstream players cannot agree on their likely
demand. Switching to mitigate
uncertain demand is a commercial viability issue. If downstream players are not certain of demand what good will LPD's analysis be in the upcoming FID? A wide margin of error will be required but debt funders will want that margin of error to be narrow.
Based on what we know the quote yesterday also says “It
was evident from discussions …
about 1 year ago … that there is an emerging need for lithium chemical companies to be able to efficiently switch between production of lithium carbonate and lithium hydroxide…
because downstream demand for one or other cannot be accurately predicted.”
No-one wants to fund a white elephant.
- Debt funder says “gee LPD, you are asking me to drop circa $60m debt on this inflexible P1... seems pretty risky for my taste. The scaling ratio from pilot to P1 size is high and your customers cannot provide certainty of demand. We don’t want to be left high and dry if demand moves permanently toward carbonate, or vice versa”.
- LPD responds “no problem… we will make a plant that can switch outputs to reduce your risk … if the downstream demand changes you will still get your money back”.
In this scenario the primary benefit of switch-ability seems to support the debt funding activities. It seems to me that LPD needs to secure both a carbonate and a hydroxide offtake because one by itself will not be fundable. This is yet to play out so I protect my own downside risk – it is one reason why I continue to not take LPD announcements at face value.
Also, let me approach this same quote from a procurement angle. We know this new L-Max switch-ability will be patent protected in a few years. Other converters may find their own way to switch but who knows if/when they will discover their own method. At first this sounds like SM has developed some type of amazing first mover advantage.
A reality check is that strategic sourcing and integrated supply chains are deeply embedded within the auto industry. Procurement teams have made a science out if it and they wear it as a badge of honor. Down stream players don’t/won’t base their short- or medium-term supply strategies on something that only one converter within an industry can do. The preferred procurement strategy is to source inputs from various pre-qualified converters. This is done regardless of the whether any single converter can/cannot switch its output.
It seems the need to switch is not with the cathode makers or EV assemblers. They can choose from a range of specialists and/or x1 converter that can switch between outputs. It seems the 'emerging need to switch' lies with x1 converter trying to develop a viable business model.
This is the challenge - scale up and be switch-able or scale down and specialize. A lot of R&D sunk costs mean scale down is not good for LPD. Must scale up and do whatever is required to reduce funding risk.
That is how I link yesterdays news with the upcoming FID. Watching with interest.
A
(20min delay)