Lithium demand is still rising and rising quickly. While not shown in these graphs, stationary storage demand is also rising quickly. No major market is showing a decline in EV sales. No major market is showing even flat projected market share. In all the markets shown, the question is how quickly demand is growing. On this forecast demand growth is 24% in 2024 or 3.6m vehicles of growth. As context, the anticipated growth in 2024 exceeds the entire sales EV production volume that existed in 2020 (and any individual year prior to that). The 2025 forecast increase of 4.9m vehicles would be the largest annual increase ever.
Intuitively the expected supply/demand combinations are rising demand = rising prices, falling demand = falling prices. The other two combinations are however still possible. You can get falling demand and rising prices or rising demand and falling prices. These last two scenarios are less common, particularly a rapid increase in demand and a rapid fall in prices. For Lithium this situation became possible and indeed probable due to some very high prices recently. The extent of the fall has surprised many, myself included. The situation of rising demand and falling prices is not sustainable in the medium or long term, but can exist for a longer than might appear likely in the short term. Part of the issue is companies applying low-growth product thinking which may not be the profit maximising option for shareholders (more on that later).
As the situation of rising demand and falling prices is unusual, it prompts all sorts of market manipulation comments. Because its uncommon, doubt exists around the demand side of the equation, is that demand really there? Various reasons will be put forward for why demand isn't growing!! Those views have been presented so often they don't need repeating. With demand actually growing quickly, they typically contain some logic error such as confusing slowing growth rates with being a decline in demand or missing high growth forecasts as demand doesn't exist.
Clearly the fall in lithium prices occurred as everyone wanted a piece of the high lithium price action and any/every source of lithium available started to come online. This created enough of a supply response that supply at least matched if not overtook rapidly growing demand. You had all five key potential sources activate (existing projects expanded, new projects commenced, past C&M projects restarted, new higher cost sources like DSO/lepidolite emerge and supply lines found a way to hold less inventory). In the medium term this is arguably a good thing as it provides some confidence to OEM's that a supply response can and will occur. The system meeting their needs is a function of price not absolute capability to increase volumes. In the immediate future the question is which project that wanted a piece of the high price action either reduces supply or reduces their growth plans. Some of these supply responses are now declining (less eg DSO, flat to declining Chinese lepidolite volumes). Low prices are working to reduce supply.
What the system appears to need is a change in mindset from selling as much as I can today to OPEC thinking - getting as much as I can for the product being sold. Surprisingly, a legal commercial solution is available to Hard rock and Brine producers. What they would need to do is make a decision to voluntarily invest in finished intermediate/final goods inventory where that intermediate/final goods inventory has an indefinite shelf life (hydroxide as a specialty chemical has a short shelf life). The company would clearly signal to the market what they were doing to avoid confusion that it was an inability to sell product. Where the cause of declining prices is declining demand, this would be stupid but future lithium demand isn't declining. All major forecasts contain a future supply shortfall. Lets consider if Greenbushes were to invest 20% of production into finished but to be sold later SC6 inventory. With their low cost structure they would clearly still cover all operating costs from 80% sales. DMS output SC6 is still rock chips so it wouldn't appear to need special storage conditions.
Greenbushes could stockpile perhaps 280kt of SC6/yr with a today sale price of US$1,000/t or US$280m of deferred revenue. When prices rebound, they sell the product. Assuming its 2027 when they sell that product, and that they get US$2,000/t they receive US$560m from selling the same product. Before royalties they make another US$280m in EBITDA for shareholders by the deferral in selling decision and effectively get a 26% pa return by deferring the sale (if the product were sold at US$2,000/t). If supply is tight and prices were to increase to US$3,000/t then deferring these sale deferrals would provide a 44.2% pa return on investing in inventory. If a couple of other miners were to copy this model for maximising shareholder returns, I think falling prices would end extremely quickly. This would be a new business model responding to a product with extremely high growth rates. The return per year figures quoted below are beyond most investment options companies would have available to them. They don't factor in royalties payable.
This option is most readily available to companies with existing huge cash balances or an ability to tap the debt market (almost all the returns below are above commercial borrowing rates). Core may effectively already be doing this if its future plans involve a modest scale flotation plant in addition to the existing DMS. The existing low recovery rate is producing perhaps 20%+ fines. These fines are being stockpiled onsite (so lets call that a fines ROM for flotation). In a few years, Core could start turning all these fines into concentrate and future sales (with zero mining costs while the fines ROM is processed).
CXO Price at posting:
21.0¢ Sentiment: Buy Disclosure: Held
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