Rodney Hooper's latest LinkedIn post (edited to make more concise) to see full article - https://www.linkedin.com/pulse/2020-finally-going-year-lithium-rodney-hooper
Of note there is discussion of the cost difference between Hydroxide from WA spodumene and brine. It debunks some of what I believe to be misinformation about a competitive advantage for Hydroxide production from Hard Rock.
Its a really interesting article that is well worth a full read, but I condensed it for those not wanting a long post.
At the start of the year, I highlighted demand as the key driver for the industry. With the reduction in Chinese buyer subsidies in June, we've seen EV sales plummet in that market much more than forecast in the second half of 2019. The fortunes of auto sales have been uncorrelated with stock market indices and economic growth. Despite lithium annual demand growth estimates for 2019 ranging around +13%-18%, new supply, driven mainly by Western Australian ("WA") spodumene concentrate production, sees the industry exit 2019 with about six months inventory, projects on care and maintenance and others placed on hold. Yet we see record (future) battery demand from the OEMs Albemarle suggesting $225bn by OEM/battery co’s) and investments being made downstream along with the proposed launch of more than 250 EV models in the next two years. How is it possible that the BMI "megafactory" tracker can climb daily, underpinned by record battery orders and model launches from OEMs yet the lithium industry cannot attract investment, is oversupplied, and reference prices are falling?
There are numerous reasons for this, let me start with one - a simple reality - lithium is a specialty chemicals business - however, the fundamental laws and principles of supply/demand for commodities remain intact. Excess inventories can cause prices to fall well below the marginal cost of production. Orocobre has guided $5,400/t for its “primary grade” carbonate product in Q4, that's only marginally above the SC6 raw material feedstock input cost alone for Chinese non-integrated converters. The excellent news for lithium is that a) demand growth "should" be around +15%-20% p.a. until mass adoption of EVs and then potentially even faster b) underinvestment always comes home to roost, the sheer quantum of annual demand growth will exceed 100KT in 2022/3, a huge ask for the industry. One caveat, we've seen how quickly the Chinese conversion industry can grow (2018/2019) if potential returns are high enough. There is no shortage of available spodumene concentrate to feed Chinese converters. Permitting and construction are not obstacles in China (but the quality may well be). Tesla's Shanghai GF is proof of "China speed", being built in just 168 working days. Market prices will play a key role in determining supply. How real is the hard rock (mostly WA)/chemicals (China) threat?
The truth is that most WA spodumene producers will struggle to get their total cost of sales (not the cost of production) down below $450/t-$500/t after including exploration/depreciation/interest/sustaining capex. According to our models, we see $600/t as the mid to long-term price for SC6, subject to impurity limitations. After factoring in VAT, a 15% operating margin and conversion costs, this is consistent with our long-term chemical prices for China of $10,500-$11,000/t. If other countries begin exporting large volumes of SC6 and can undercut WA SC6 costs (incl freight), then those long-term Chinese estimates can go lower. We see a ~15% operating margin as the inflection point above which additional capacity will come online in China. After factoring in quality (reprocessing costs)/sustainability/carbon footprint/credit quality/volumes/consistency, we believe that battery/OEMs will continue to pay a $2,000/t premium for ex-China chemical supply meaning a long-term battery-grade/quality price of $12,500/t - $13,000/t. Production from China that qualifies for export (Ganfeng, ALB, Tianqi, Livent) will earn the premium; however, it's a matter of when not if a VAT/carbon tax/penalty system is introduced across the battery supply chain. A penalty would reduce the premium earned - the quantum will depend on feedstock, conversion process and energy sources.
(Ganfeng) has qualified its hydroxide for export along with its carbonate products. While ramp-ups are never easy, Ganfeng is the stand-out performer of 2019. Input costs from SC6 exports from WA (non-integrated) place the company higher up the cost curve; however, lower conversion costs than peers and superior export prices to Asia (along with investments in lower opex Cauchari and Sonora) will ensure Ganfeng continues to make a positive operating margin during difficult market conditions.
China EV sales are under pressure; Europe is destined to achieve +1mn EV sales in 2020. By reducing direct buyer subsidies, China removed the "carrot" incentive from Chinese buyers.
Europe in general and individual countries, in particular, have introduced both carrot and stick incentives. CO2 emission penalties are severe, essentially forcing OEMs to sell EVs; however, rather than transfer the entire burden onto the OEMs, certain governments have increased buyer subsidies and improved the charging network amongst other incentives.already.
Most future production being idled is in WA, the reason - the cost of mining and processing lithium ore in WA is too high, thanks to a combination of labour, diesel and energy rates, WA's input costs are substantially higher than the US and elsewhere. To add to miners woes, the WA government is looking to generate tax revenues while the industry is still in its infancy. The boom of 2015-2017 encouraged the state to believe that the industry can bear the cost of 5% royalties on top of 30% income taxes regardless of profitability. High strip ratio projects are uneconomic under these conditions. WA has the benefit of proximity to China, but lower transport costs aren't enough to offset the balance. As Tianqi and Albemarle have both seen significant cost overruns at their chemical conversion plants (Kwinana/Kemerton), the prospect of a downstream "lithium valley" is waining. China and Europe have grasped the importance and revenue potential of the battery supply chain as well as both job loss threat and job creation opportunity - WA has substantial natural resources and doesn't see the need to give lithium any preferential treatment. However, the lithium value proposition is downstream, and WA appears fundamentally uncompetitive in that area. Perhaps when Albemarle/Min Res ship Wodgina ore to be tolled or processed in China along with Talison material someone will take notice.
In my opinion, the operating cost of producing hydroxide from hard rock will be at least $7,000/t (incl all royalties) in WA - above carbonate from brine that's converted into hydroxide. SQM's expansion plans are mostly carbonate; their 2025 hydroxide capacity is capped around 29,000tpa (of variable quality). It will be cheaper (capex and opex) for SQM to convert carbonate to hydroxide from the Atacama than it will be to develop Mt Holland. If market share is their ambition, then they need hydroxide tonnage desperately - that's the future of demand growth, but the Atacama is their cheapest entry into that market. If Wesfarmers is determined to proceed with Mt Holland, SQM may be better off selling its 50% share at a similar valuation to the Kidman deal and re-investing the proceeds into domestic production and potentially carbonate reprocessing capacity offshore. Tianqi (Kwinana) is processing Greenbushes ore and ramping slowly, Mt Holland's mine concentrator needs to be commissioned and ramped up before the chemical converter can follow and begin qualifying its material. The entire project is greenfield, expect delays. Companies that consistently produce a premium chemical product for the EV battery market at a low capex/opex will enjoy premium ratings (Ganfeng). With limited demand growth for low-grade material, failure to meet future battery quality standards could put the non-integrated hard rock/converter business model to the test. Brines have more breathing room given their lower opex costs ($3-$4.5/kg), more abundant resources and longer project lives. Bottom line - in my opinion, both non-integrated Chinese converters and integrated WA projects (AUS SC6 and AUS chemical conversion) sit above reprocessed carbonate from brines on the OEM qualified battery-grade hydroxide cost curve. Brines have a future in the hydroxide market if their Li2CO3 input cost is ~$4,000/t and the Li2CO3 can be reprocessed into battery quality hydroxide.
We are strong supporters of conventional projects that have realistic capex/opex estimates and offer robust returns even after stress testing operational performance and chemical prices. Looking at Albemarle's latest investor day presentation (and SQM's), they forecast that 2025 supply will almost exclusively come from incumbents. If you strip out expected independent Chinese converter expansions, there's little room for other projects.
2020 will be about European EV demand, 2020/1 will see the US become meaningful with all the new EV launches (Model Y, Cybertruck, Rivian, F-150, Amazon fleet and many others).
The average EV sale price is falling - as VW and others enter the mass market segment ($20k-$40k), coupled with decent buyer subsidies (Germany, California, others) expect sales to start increasing rapidly. The introduction of well-priced SUVs will also make a meaningful impact. China EV sales will remain key to global growth but are not the only story as it was in 2017/2018.
So will 2020 finally be the year for lithium? We're not out of the woods yet. There's an excess of inventory that needs to be worked through before the market can tighten. We believe the hydroxide market will tighten first. If more offtake contracts like the recent BMW/Ganfeng deal are signed, downstream buyers may figure out more future supply is needed. Given all the new model launches due in 2020-2022 OEMs should be doing that exercise. Incumbents will lead the recovery; first, development projects will rally after that. Quality and consistency are essential; soon, sustainability/carbon footprint will be significant as well. For this reason, DLE technologies offer promise and could play a meaningful role post-2025. These projects could see further investment in 2020. Only a limited number of new projects will be financed; investors checklists should include stress testing company assumptions, including operating costs, working capital and chemical prices. The lithium industry needs to show the investment community it can execute as promised - that is key.
*I have endeavored to not change the context of my editing but apolgise if I have inadvertently done so.
