A good read out of the FIn Rev recently. Not exactly a rosy picture, but the bottom for lithium pricing is likely close. Too much supply, large inventories and lower sales all hurt. Further production cuts may come. It may take a few years to work through the cycle(s)
The final paragraph (hopefully) bodes well for the up and comers in the lithium space
.
Comeuppance can be brutal in financial markets, but rarely as brutal as that handed to investors in battery metals last year.That’s partly because the huge run-up in lithium prices in 2022 may have led some investors to assume the apparently indispensable commodities were entering a new phase of maturity.
But it’s mostly just because of the sheer violence of the sell-off and the tough consequences for some smaller players. Spodumene – a hard-rock ore that is the most common source of lithium mined in Australia – containing 6 per cent lithium is fetching $US850 ($1293) a tonne, down from $US6400 a tonne just over a year ago, according to Benchmark Mineral Intelligence. Pilbara Minerals says it topped $US7000 a tonne. After price falls of nearly 90 per cent, investors will be scratching around for a bottom, and a buy signal.
As much as we’d like to give them one, and as compelling as the trend towards electrification is, the prudent advice seems to be: not yet.
It seems the new phase of maturity is another cycle or two (or three) away, and, in the words of Allan Gray managing director Simon Mawhinney, a typical commodity boom and bust cycle has set in. Electric vehicle hype attracted a lot of capital (when it was a lot cheaper than now), and supply outran demand.
The severity of the cycle has been exacerbated by the fact that lithium isn’t yet a mature commodity, says Hedley Widdup, an executive director at listed mining investor Lion Selection. Changes in production (new mines and gigafactories) and demand (the pace of growth in electric vehicle sales) have a much bigger impact than in mature commodities markets such as iron ore and copper.One reason for caution is that lithium mining bosses who should know best are not demurring from forecasts of further falls. Mineral Resources’ billionaire boss Chris Ellison said on Thursday he thought prices had further to drop, and Pilbara Minerals’ Dale Henderson said on Wednesday he wouldn’t argue with consultancy Wood Mackenzie’s forecast that lithium – and other battery metals such as cobalt and nickel – will remain oversupplied for several years.
Another is that the stocks of lithium producers and explorers have not retraced their boomtime gains nearly as much as their commodity has.Shares in Pilbara Minerals are down just under 35 per cent from their October 2022 peak, while MinRes shares are down 36 per cent. Their stickiness probably reflects their leading producer status; smaller or aspiring producers have fared worse. Liontown Resources, which had a $760 million loan to fund expansion abruptly pulled by the big banks is two-thirds off its peak.Benchmark Mineral Intelligence’s lithium analyst Cameron Perks says the firm’s pricing outlook is “subdued for the next few years”, although “we do believe that pricing is at its low, and will again improve, and we believe that pricing is currently well under incentive price levels”.Incentive prices are the prices required to cover new investments in capacity. When prices are well below incentive prices, capacity is more likely to be taken out of the market than added, which is what has been happening.
Core Lithium’s closure speaks volumes: the Northern Territory’s only lithium producer this month suspended operations at its Grants open pit mine. US giant Albemarle has also scaled back proposed investment in Western Australian processing.Still, as Perks says, “We do need to see further cuts to production to see reversal of the situation we’re in.”Nevertheless, the larger Australian lithium miners are putting on a bold front. MinRes is continuing with a $1 billion investment spree in early stage lithium explorers, and this week increased its stake in Kali Metals, in which Ellison has a personal stake.Ellison said discussions with Chinese giant Gangfeng and Albemarle revealed shrinking inventories – a precondition to prices bottoming – and MinRes would follow the traditional big commodity producers’ playbook of “land-banking” quality tenements while the market searched for a bottom.Pilbara’s Henderson said he expected more mines and projects to fold if prices remain low, and Pilbara would look to snap them up, just as it picked up Altura during the 2019-20 price slump.Average investors might think if it’s good enough for them, then why not? But they don’t have the deep pockets of these players – Pilbara is sitting on $2.1 billion of cash from the years of plenty – nor the “networks” or industry instincts.
So they have to satisfy themselves on fundamentals, and the fundamentals for the metal have a number of moving parts.Electrification of transport, obviously, still has a long way to run. Benchmark expects global sales of electric vehicles to quadruple over the decade to 2033 – to 59.1 million from 13.8 million in 2023 – and lithium demand to increase fivefold over the same period to more than 5 million tonnes of lithium carbonate equivalent. (The difference in growth rates reflects the fact that EV makers are the dominant buyers of lithium-ion batteries, but not the only buyers.)These are compound annual growth rates – 15.6 per cent and 17.5 per cent – that investors in more mature commodities would be ecstatic about.
The problem for the lithium industry is that compound annual growth in EV sales in the three years to 2023 averaged an unrepeatable 61 per cent, and lithium and battery producers took advantage of the cheap capital then available to dramatically expand their capacity, in anticipation of more of the same or something roughly approximating it.When reality set it, it turned out they had they overshot – quite significantly.
Wood Mackenzie cites an estimate from the China Automotive Battery Innovation Alliance that of the 747 gigawatt hours worth of power batteries produced in China in 2023, only 387 GWh were installed into products. It suggests that car makers are likely sitting on supplies for EV sales that failed to materialise. Batteries are costly to store, and car makers that stockpiled batteries will want to bring them to market sooner rather than later. That means prices will have to be discounted to move surplus stock.Mawhinney likens it to the boom in platinum group metals (platinum, palladium, rhodium) used in catalytic converters in the early 2000s: production and supply outran demand because makers of catalytic converters – devices that neutralise toxic exhaust gases from internal combustion engines – came up with innovations that required less of the metals, and recycling increased.
That’s a reminder that there are competing battery chemistries, such as sodium, that don’t use lithium or nickel. Recycling is also just getting started. Lithium batteries, however, have such a huge lead in vehicle propulsion that it’s hard to see them being eclipsed except in the long term. The plunge in lithium prices is great for consumers, and for the clean energy transition. But for investors like Widdup, the big names have had their time in the sun and better value may be found among early stage explorers with strong management. But, says Widdup, “To be opportunistic you need to be fairly confident that the hot equity sentiment has settled or washed out.”
Expand
(20min delay)