This is a must-read from SQM.

Daniel Jimenez: There's Still Room for Lithium Prices to Grow Further

Priscila Barrera

August 01, 2022

LITHIUM INVESTING

INN sat down with iLi Markets' Daniel Jimenez, who shared his thoughts on lithium pricing, supply and demand and more.

Lithium prices reached unprecedented heights in 2021, and even though they have been stabilizing at elevated levels in recent months, they still have room to grow, according to Daniel Jimenez of iLi Markets.

Speaking with the Investing News Network (INN) at Fastmarkets’ Lithium Supply and Raw Materials conference, the former vice president with SQM (NYSE:SQM) shared his insights on pricing, supply and demand dynamics and what could be ahead until midway through the decade for a market that keeps growing every year.

Read the interview below to learn more about his thoughts. You can also click here for INN's YouTube playlist of audio interviews from the Fastmarkets event.

INN: How are you finding sentiment in the lithium industry this year, and how does it compare with what is happening in the markets right now?

Daniel Jimenez: I would say there’s a common understanding that demand is strong, that it's going to continue to be growing at a stronger rate than supply and that most likely in the next few years there will be a bottleneck in the electrification of fleets.

INN: At the conference, you were part of a panel discussing what lithium consumers can do to secure lithium supply today. Why, in your opinion, is this becoming more and more challenging?

DJ: It is becoming challenging because when we think about the short term, production increases will come from incumbents. And these incumbents, they have a customer base, so they will of course privilege those types of accounts, rather than getting new customers. So it is difficult for somebody who has not been in the mainstream to source and get a portion of that incremental lithium.

The other thing that is left is then to bet on projects. But the truth is we do not have too many projects coming up into production over the next two years; projects usually have delays, usually have complications in the ramp-up phase. It's also very risky to rely on a project before it's actually in production and before you face the reality of what this project can really do.

So essentially buyers today, when we talk about the next three years, they have to try to get into the books of existing producers, who have probably most of the book already completed for all their expansions.

INN: Looking then at the producers' side of the equation, what do you think is the biggest risk for them in the current market? And how does that compare to the risks faced by explorers and developers?

DJ: From a producer's perspective, I do not see too many risks at the moment, and I also do not see much risk on the exploration side. Actually, exploration has become a lot less risky because with these new price levels, which the industry expects for lithium, resources that we wouldn't have looked at six years ago are a prime target today.

From the project developers' side, the most important risk is permitting. Permitting has become a very difficult issue in many jurisdictions, and very difficult to meet the targets governments have imposed. And a good example of that is Europe or North America.

I will tell you there's also a big group of explorers who also have resource and technology risks. When we talk about direct lithium extraction, the projects certainly have a risk — they at least have not been massively scaled up in the world, and whether they will work with specific new resources or different resources is a question mark. Then you have resources, or other types of resources like clays, where again we don't have a large-scale industrial operation producing lithium out of clays, and the risk of that naturally exists there.

INN: You touched on prices and how they are affecting lithium exploration. I think a question that's been around investors’ minds is how high prices can go. What is your opinion, and are such high prices good for the industry in the long term?

DJ: Prices are a consequence of supply and demand, and in this market where we have an extreme shortage of lithium today, it's a little bit down now, I think primarily because of Chinese lockdowns, but that gives you a sense of where prices could be on a permanent basis.

But I think they could be even higher. If you think that today’s production is slowed down by supply chain disruptions, by chips which are not there, by the lockdowns in China, imagine what could have been the price back in March, April if none of that would have been happening. So I think there is room for prices to increase further.

Is it sustainable long term? It depends on what you think of the long term, but I would think that prices will remain high or very high, and by that I mean above US$40 (per kilogram), at least for the next three, four years. That’s simply because demand is going to continue growing, and the incremental supply which is going to be put into the market will not be sufficient to satisfy that demand. Therefore, lithium would be a limiting factor for the increased penetration rate of electric vehicles (EVs).

Now what happens if we are talking five years from today and onwards? Well, today we're seeing a lot of money being put into the industry. We will see the consequence of that in terms of output of production, five years from now. And yes, there could be a moment where there’s a balanced market and prices could adjust downwards. To what level at that point? Those five years will be years in which we will see prices above greenfield development incentive price levels, so probably above US$30. So from a producer's perspective, whoever is producing today should have 10 years of very, very high prices relative to what we were imagining prices were going to be three years ago.

INN: So if supply isn't able to meet demand, what are some of the moves you're expecting to see from original equipment manufacturers (OEMs)? And from the industry?

DJ: OEMs are starting to make big efforts really in trying to secure their lithium supply. And whether they do it through the supply chain, battery suppliers or cathode suppliers or directly, one way or the other will work. But what we have seen is that more and more OEMs are starting to take control of that on their own.

INN: Do you expect big oil companies to make acquisitions in lithium going forward, or to partner with lithium companies? And what other types of big companies do you think could jump into this market via mergers and acquisitions or partnerships?

DJ: Yes, I think oil producers are looking into this industry. We just had the announcement of ExxonMobil (NYSE:XOM) getting involved, and we have seen them over the last years wandering around in the conference.

Now, in terms of the size of the industry, it's hard for me to believe that a big oil company will be getting involved in one lithium project. It's simply too small for the scale they operate. So I could imagine that rather they will be after one of the bigger lithium producers. So if I see them here, I would see them really in that space more than getting involved in particular projects.

INN: Here at the event you talked about the costs of becoming a lithium miner today. We are seeing a lot of new players emerging all over the world. Which type of company do you think will be best positioned to succeed in the sector?

DJ: I would think that more than the types of companies which will succeed, I think we have to think of the resources, the jurisdiction, the technology, the people. The better the resource, the chances are higher to succeed. The better the production process is understood, the higher the chances are.

I would say the success rate will be significantly higher with projects which incorporate in their teams people with experiences from different fields. And when we're talking about brines, that experience has to be sought in Chile, mostly; when we talk about mineral extraction, that is in Australia; and when we talk about refining, that is in China — that's the world today. And that's why to bring in people with experience is key.

INN: The supply dynamics in the lithium market are also changing at a regional level. What do you think the west can learn from China, and Asia as a whole, when it comes to building its lithium supply chain? And what do you think it can do better?

DJ: It's a little bit of an unfair question in the sense that I don't blame the west for having been late. The truth is this story started in Japan with batteries, then moved into Korea and China. China was very good at recognizing the opportunity and moved very quickly into that. And the whole ecosystem is built in Japan, Korea and China today.

It is very difficult to do anything upstream, when we're talking about cells, cathode production, if you're not centered where EVs are being produced at the end. This supply chain is starting to move in the direction of Europe, EV production has moved to Europe. It's immediately followed by cell manufacturing. And we will have important cell production in Europe. The cathode industry is now following, with the first cathode production in Europe being started up now.

So I think this is going to naturally happen once electrification of cars becomes massive. And I think the relative advantage China has today will be more in the fact that they have probably developed technologies in specific areas where the west is behind.

INN: Is there a possibility then that regions like Europe and countries like the US may supply their own lithium needs at some point and move away from China?

DJ: I think with regards to EV manufacturing, to cell and to cathode production, they will be able to do it. What Europe and North America will probably never be able to do is to be sufficient in lithium. And simply because lithium is not present at scale, at the grade, at the extraction possibilities that you have in South America or in Australia.

The independence will be relative in the sense that Europe and North America will probably always depend on Australia and South America. China today is extremely vulnerable. It has very, very little lithium as a resource. So I don't think that the west so to say is under any major risk, longer term. This is a natural movement of the industry or the upstream little by little.

INN: Another big theme here at the conference has been recycling. Do you think this will become a large part of supplying lithium in the future? And when do you expect this to happen?

DJ: Today we're starting to see recycling being important, but that recycling is primarily recycling of production, either off-spec cathode material or scrap materials from the production of cells. So it's all within the supply chain, it hasn't gone out into the market.

I think we're only going to start seeing massive recycling once batteries in EVs come to end of life. And that will be happening, if we assume that a battery will have a life of seven to 10 years, towards the end of the decade. That of course will also change the overall supply/demand picture quite significantly.

Based on the numbers we have played with, and again this is mathematics, you could easily think that most of the demand increases from 2035 onwards will be supplied by lithium coming out of spent batteries which have been recycled and which were produced or extracted 10 years before. We will most likely see a market in which the high amount of primary lithium, so mined lithium — the requirement of incremental demand, year by year — will be decreasing. So during this decade, we need to produce significantly more lithium every year. But during the next decade, probably that wouldn't be necessary to that extent.

INN: Finally could you define briefly for our investor audience what you are expecting to happen in the lithium space from now until 2025?

DJ: I would expect to have a tight market for lithium. We will probably see high prices, and that will very much define the next year, meaning the issue of OEMs and cell manufacturers to secure lithium. It wouldn't surprise me that we see a significant amount of upstream and downstream players so to say. And — and this might be something which takes off this pressure and brings some relief towards the second half of this decade — but for at least the next four years, I think supply needs to be significantly more than what we have today. And I'd rather say the risk is that supply is lower than what we're focusing today because of ramping up issues.