The very high price volatility in lithium market is a unique thing and it's quite normal. We saw 80% price fall and we will probably see same thing upwards again as we saw in 2022.
Because the lithium market;
- is in its infancy and not settled down and not balanced,
- there are not very big players such as in iron ore business in China (excluding Tianqi and Ganfeng in China which are also unhappy by the low lithium price),
- there have been many small and mid sized uneducated bandit players who ship even the raw rock from Zimbabwe and Afghanistan due to very high profits occurred in 2022, which are all out now,
- there have been many small miners popped up in China's lepidolite mining regions which started production without making any concern about feasibility and waste management. Majority of them also out now too.
Just imagine, there was no properly planned lithium mining in 2012, not long, only 12 years ago. There was only Greenbushes mine. No belief about the EV revolution at that time either. Everything just happened very quickly. The world needs a lot of lithium but you can see building a proper hard rock mine takes nearly 7 years.
Also imagine how China buys iron ore from Australia at these very high profitable prices for the Australian miners. Isn't there other iron ore mines in other parts of the world? Yes there are. Isn't there large size resource in Africa which the Chinese companies can develop? Yes there are many.
But the Chinese steel makers still have to buy from Australia because they need a lot of iron ore, they have huge steel production plants, so they can't rely on African resources due to sovereign risk. They can't risk their production and revenues by relying on unstable resources and countries. Also the iron ore from Australia is very high grade and same type of ore.
That's why the Chinese iron ore buyers which are very big companies pay the premium and buy huge amount of iron ore from Australia.
Btw, just imagine when Ganfeng, Tianqi and CATL started their lithium businesses, just recently. I believe even their bosses are very experienced in business before setting up these companies. Also the owners and managements of other small and mid size lithium companies in China are all uneducated and greedy people who want to make quick bucks. They will be all lost soon.
Now imagine the same thing for lithium spod concentrate. The EV sales are increasing, China will reach the 50% EV/ICE ratio around 2026 at latest. And China's EV exports are increasing a lot, also never underestimate the ESS potential which is increasing a lot (just imagine that LTR has now 16Mwh battery storage capacity at KV).
The lithium market is about to settle down and will be a huge market very soon. Then the large size Chinese lithium buyers will have to prefer to make long term contracts with the Australian lithium producers. This is already happening as you see PLS's offtake agreements with the large Chinese lithium companies including the lithium miners Ganfeng.
I'm not talking about the Korean, Japanese, US and European buyers here. They will also be very big buyers for lithium after they organise their EV plans properly (not the Koreans though they are OK, they are already big buyers).
There can't be a fixed spot market for lithium. We always said "Now all lithium is equal". Lithium is not similar to iron ore.
Also, because the lithium supply chain is very long and complicated, it will be even harder to make long term reliable contracts for the large lithium buyers than the iron ore buyers as the iron ore supply chain is very short and simple.
Another important difference between the lithium and iron ore business is that, as you may remember when the iron ore prices were crashed the large iron ore producers kept producing and killed the small ones.
But that is not the case in lithium business. As you can see the largest miner of lithium the Greenbushes mine cut the production. That is the opposite of what happened in iron ore business. Because Greenbushes has a limited high grade ore it will run out around 2032 at latest. (They are making production by the head grade of 2.7% which is very high for having a very low production cost. When you look at their MRE tables you can see 447mt at 1.5% grade but that's BS. For producing that resource they have to spend $3b+ money, relocate all the process plants for at least 2 years at the best time of lithium market. So they should forget about that plan and keep producing the 2.7% ore.
That's why Greenbushes cut the production but not for anything else. There is no other high grade like Greenbushes, not in the horizon. So there is no similarity between lithium and iron ore businesses.
PLS hasn't cut production because PLS has a lot of low grade ore but no high grade ore. However PLS's cost is more than 5 times of Greenbushes's cost. PLS is acting opportunistic but it's OK. As long as their cost is high they can't make much difference in the prices. They have to sell high too.
Another important point is that China buys the majority of iron ore from the world market. The rest of the world is not much interested in buying iron ore.
But still China thinks that they have to buy the high grade Australian iron ore at a premium price. The is not the same in lithium business. The European, Korean, Japanese and the US buyers all need a lot of lithium.
I believe the lithium price crash was done by the big players at the big end of downstream players; they are BYD, CATL and even Tesla. They played this game IMO. But now they will have to regret to do that very soon.
Because the lithium prices let down dramatically now many development projects suspended and new exploration activities in danger. That is going to be a big problem for the lithium buyers because we will most probably see the lithium price soaring again soon.
(20min delay)
