Once bitten, Australian lithium miners will be twice shy on supply
Having spoilt their own party with too much supply too quickly during the last lithium boom, will Australian miners be more judicious this time?
Lithium price graphs have had steeper inclines than the ramps at the Pilgangoora lithium mine in WA.
A stroke of Treasurer Josh Frydenberg’s pen is all it would take for more Australian lithium to leave these shores at a time when desperate customers in Asia are paying record prices for the battery mineral.
Mr Frydenberg’s Foreign Investment Review Board has spent the best part of a year mulling whether to grant permission for a company called Austroid to take ownership of the Bald Hill lithium mine and processing plant in Western Australia.
Lithium price graphs have had steeper inclines than the ramps at the Pilgangoora lithium mine in WA.
Bald Hill was one of the six Australian lithium mines that rushed into the market during the boom of 2017 and 2018, only to be shut in August 2019 when sliding lithium prices pushed its owner into administration.
A price of $US780 a tonne for the lithium-rich spodumene concentrate produced at Bald Hill was enough for the mine to generate positive cash flow from operations in the first three months of 2019.
If Bald Hill were operating today, its product would sell for closer to $US3250 a tonne in the daily “spot” markets.
But rather than spitting out spodumene and creaming cash, Bald Hill is standing idle while FIRB ponders its verdict on Austroid’s agreement to buy Bald Hill from the administrators of its failed parent.
Multibillion-dollar question
There may be good reasons why the FIRB is taking its time; Nevada-registered Austroid has some common links to the Chinese-backed company that originally struck a FIRB-dependent purchase agreement with Bald Hill’s administrators.
The Chinese-backed deal did not complete for reasons that remain unclear.
Bald Hill’s prolonged state of limbo provides investors with a timely reminder that amid euphoric lithium prices, there is plenty more spodumene supply that could theoretically hit the market quickly.
The multibillion-dollar question is how quickly producers in Australia and other countries will respond to the bonanza prices on offer.
Bald Hill is not the only ghost of the last lithium boom that could come back to life this year.
Pilbara Minerals is in the processing of restarting the lithium assets that were run during the last boom by Altura Mining, before it too fell on hard times.
Mineral Resources will in coming months sell some of the stockpiled material that is lying around its idled Wodgina mine, and a three-year mining hiatus at Wodgina is scheduled to come to an end in the final three months of this year.
Northern Territory spodumene will hit the market about the same time, with ASX-listed Core Lithium expecting to start exporting before Christmas.
While all that is happening, the world’s biggest and best spodumene mine – Greenbushes in WA – operates in a constant state of gradual production growth.
“In 2022, Australia will see the largest growth in lithium units globally with growth around 28 per cent year-on-year,” Wood Mackenzie analyst Allan Pedersen said.
Having crushed spodumene prices with their exuberant supply surge during the last boom, will Australian lithium miners do it all again?
Operational hiccups
With Wodgina and Core both guiding to the final months of 2022, Canaccord analysts Reg Spencer and Tim Hoff reckon there is very little extra spodumene supply that could hit the market and dampen prices in the next six months at least.
“We do not see an easy route for the market to balance throughout the year,” they said in a note to clients.
If anything, spodumene supply appears more likely to underwhelm in the next six months.
Operational hiccups have hampered Pilbara Minerals’ ability to ramp up output in recent months and those hiccups have been exacerbated by supply chain delays and WA’s labour shortage.
Pilbara Minerals is expected to downgrade annual production targets later this month, and if it does, it would be the company’s second downgrade in the space of two months.
The gradual spread of COVID-19 into WA could be a further headwind to productivity in the next six months, given the state dominates Australian lithium exports.
Canaccord expects spodumene contract prices – which are typically set with reference to prices for battery-grade lithium in the previous three or six months – to peak about July at close to $US3600 s tonne.
Hi
The tiny volumes of spodumene that get sold in daily “spot” markets between now and then could fetch even higher prices.
When Wodgina does restart, Mineral Resources managing director Chris Ellison said it would be with a clear focus on value over volume.
“We have the capability to turn on three [processing] trains up there, [but] we are not doing that. We are just going to take this slowly and make sure we get it ramped up properly,” he said of the plan to restart just one processing train at Wodgina.
“Trains two and three are sitting ready, willing and able to go, and we will restart them in line with market demand.”
Supply discipline at Wodgina is important; at full capacity, the mine can produce about five times as much spodumene concentrate as Bald Hill.
Big unknown
Canaccord believes the prices recorded in the past couple of months are triple the levels required to provide incentives for new projects to enter production, and they expect the hangover from this year’s party to be felt in 2025 when that incentivised supply hits the market and spodumene prices revert to about $US750 a tonne.
But they don’t expect the hangover to last long; Canaccord predicts surging demand for electric vehicles will ensure demand for lithium exceeds supply from 2026 onward, dragging the spodumene price back towards $US1000 a tonne.
Mr Pedersen also doubts that this year’s boom will become next year’s bust.
“The risk of growth in lithium production overwhelming demand in the coming years is very slim. Demand growth from the automotive sector will continue to be very strong,” he said.
A big unknown in the longer-term battle between spodumene supply and demand will be the rate at which Australian miners stop selling their spodumene to third parties and instead feed it into processing plants with a view to selling higher margin, battery-grade products such as lithium hydroxide.
Spodumene from Greenbushes will increasingly go that way now that the mine owners – Albemarle, Tianqi and IGO Group – are getting their lithium hydroxide plants south of Perth completed and into production.
Mineral Resources and Pilbara Minerals have similar ambitions, suggesting the spodumene growth plans announced by the miners will not translate directly to spodumene sales.
“Export of spodumene concentrate will increase less than actual production. We forecast export to increase approximately 23 per cent in 2022 and a further 11 per cent in 2023,” Mr Pedersen said.
Mineral Resources and Albemarle want to build a fleet of new lithium hydroxide plants “outside Australia” to process the spodumene mined at Wodgina, and while the proportion of Wodgina’s output fed into those plants is yet to be determined, Mr Ellison would like it to be as close to 100 per cent as possible.
Mr Ellison said last week he wants the company to go from zero to 100,000 tonnes of lithium hydroxide in five years.
The trend for miners to get closer to end consumers could leave those in the middle of the value chain – typically Chinese businesses that buy spodumene and convert it into the lithium chemicals that battery manufacturers need – in the perverse situation where mine production of spodumene is rising but less of the commodity is available for them to buy.
For those converters, owning the “upstream” mineral assets will only become more attractive.
“If you own the rock in the ground then you control your future,” Mr Ellison said.
