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    https://www.marketindex.com.au/news/citi-further-pain-on-the-horizon-for-lithium-prices

    Citi: Further pain on the horizon for Lithium prices
    By Kerry Sun
    Tue 07 Mar 23, 11:38am (AEDT)

    Source: iStock
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    KEY POINTS
    Citi downgraded its zero to twelve month outlook for lithium prices as risks begin to skew towards the downside
    China has effectively phased out all stimulus for EV purchases, which may impact sales growth in the first half of 2023
    The lithium market is set to enter a small surplus this year, subject to the supply response from Australia, Brazil and Canada
    Lithium prices are likely to remain under pressure in the March quarter and begin to stabilise in the second half of 2023.

    That’s according to Citi, which argued that Chinese lithium prices took the staircase up but the elevator down, retreating more than 30% since the start of the year. This is largely as a result of "perceived weakness in EV demand, destocking by battery and downstream players and limited buying activity,” analysts said.

    In this article, I review some of Citi’s key takeaways and catalysts for lithium.

    The story so far: No more stimulus
    Chinese EV sales spooked the lithium market after month-on-month sales fell 48%. Year on year, EV sales are down 7% as of the end of January. This marked the first year-on-year decline since 2017 (excluding the COVID period).

    China's EV market will likely be less supportive of sales growth this year after the government phased out its support scheme for EV makers and battery suppliers. The subsidies accounted for approximately 3% to 6% of the cost of the best-selling vehicles in China last year, according to Reuters.

    Deceleration not decline
    Citi expects the removal of EV subsidies in China to impact sales growth for at least the first half of the year.

    "Historically, expiration of subsidies at the year-end leads to a decline in EV sales in the initial few months of the year before momentum picks up," Citi analysts wrote

    China has been phasing out its EV subsidies since 2018, with notable cuts taking place in May 2018 and June 2019. The May 2018 cut resulted in June sales falling approximately 25% month-on-month before rebounding just one month later. While the June 2019 cut triggered a sharp 50% fall in month-on-month sales in July, sales still managed to trend upwards from November onwards.

    "We do believe this is likely to impact EV growth rates, but we see this as a deceleration rather than decline in demand," Citi analysts said.

    A separate research report by ING Economics expected the share of Chinese EV cars to grow just slightly from 26% of all passenger cars in 2022 to 27.5% in 2023. However, if China introduces new incentives for EVs, the EV share could exceed 30% this year.

    Near-term prices downgraded
    Citi has downgraded its zero to three month point price for lithium. This includes::

    Lithium carbonate from US$60,000 to US$40,000

    Lithium hydroxide from US$62,000 to US$45,000

    The investment bank has also downgraded its six to twelve month point price:

    Lithium carbonate from US$55,000 to US$50,000

    Lithium hydroxide from US$57,000 to US$53,000

    Long-term price forecasts for 2024 onwards have been left unchanged.

    Both seaborne and Chinese lithium prices were trading close to parity at around US$80,000/t last November. Seaborne prices have been holding up much better (US$65,000/t) relative to China's domestic prices (US$50,000/t).

    This can be explained by the illiquid nature of the seaborne market, which is mostly driven by offtake contracts between miners and downstream producers. However, Citi flags that the growing premium for the seaborne market suggests prices will "likely come under renewed downward pressure."

    Goodbye peak prices, brace for volatility
    Citi said it's "unlikely to see prices recover back to record US$80,000/t levels" due to the toll it would take on automaker margins and demand destruction.

    From a supply and demand perspective, the lithium market is expected to flip into a "very small surplus this year after massive deficits in the last two years." This surplus will be driven by spodumene volumes from Australia, Brazil and Canada.

    Citi flagged that spodumene projects are susceptible to several delay risks including commissioning delays, cost blowouts, labour shortages and weather disruptions, which could flip the market into a smaller deficit.

    "Even though we expect the market to be in a nominal surplus this year, any underperformance, especially on the supply side, could tilt the market to deficit, sending prices higher,” Citi analysts added.
 
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