BusinessStockheadIs your lithium stock having a rough week?...

BusinessStockheadIs your lithium stock having a rough week? China may have something to do with itMarket darlings of the ASX lithium scene are suddenly feeling pressure, with share prices tumbling. Here’s a deep dive into what’s turning the screws.Josh Chiat5 min readAugust 18, 2023 - 1:01PMStockheadLife's been a bit uncomfortable for many lithium producers. Picture: RichVintage/E+ via Getty ImagesMarket darlings of the lithium world are suddenly having a hard time of things.Pilbara Minerals (ASXLS), which has been printing cash and is poised to announce a second consecutive dividend with its FY23 results next Friday, is down more than 12 per cent over the past five trading days.Allkem (ASX:AKE) has tumbled more than 10 per cent over the same period, while IGO (ASX:IGO) is down almost 6 per cent and MinRes (ASX:MIN) almost 9 per cent.For the latest mining news, sign up here for free * daily newslettersThings are even headier for the sector’s mid-tier.Core Lithium (ASX:CXO) has suffered the biggest fall – down nearly 30 per cent in the past five days, after it had to raise $120 million for working capital and development amid ramp-up issues at its Finniss mine in the NT.The culprit – barring individual issues like those faced by Core and exceptions such as Azure Minerals (ASX:AZS) and Delta Lithium (ASXLI), who are riding high on some M&A action – is falling lithium prices in China.We’ve been here before this year.The battery metal, inextricably linked to the growth of the electric vehicle sector globally but especially in China, underwent a historic boom last year, beyond the wildest dreams of miners almost sent to the wall when prices crashed on oversupply issues in 2019.Battery grade lithium carbonate and hydroxide chemicals hit prices above $US80,000/t as EV sales increased 35 per cent worldwide, dramatically outpacing supply from the lithium sector. The 6 per cent lithium concentrate called spodumene, produced by hard rock miners in WA, was at one point fetching more than $US8000/t on the spot market.Prices fell into the $US20,000/t range earlier this year before stabilising and rebounding as Chinese converters restocked in May and June.But they have fallen for more than three weeks straight in the Middle Kingdom, with Fastmarkets last reporting North Asian lithium hydroxide prices at $US34,000/t and carbonate at $US33,000/t.At the end of June those same materials were going on the spot market for $US46,000/t and $US41,500/t respectively.And experts suggest we may not have seen a floor yet.Uncertain demand drives bear moves: BenchmarkIn its most recent price assessment Benchmark Mineral Intelligence assessed battery grade lithium carbonate down 9.2 per cent to $US33,075/t in China, with hydroxide falling 8.3 per cent to $US32,325/t.Spot prices in Asia are slightly higher, but traders and converters are moving product now in anticipation for further weakness to come.“Given the strong supply picture and perceptions of an uncertain demand outlook for Q4 2023, lithium producers and traders in China sought to shift material swiftly, in anticipation that prices would continue to fall in the near term,” BMI said.MORE FROM *: Lithium explorer taps market for cash | Evolution, Yancoal pay divvies | Oil’s not as it seems, says Boreham“Moreover, falling futures prices during the assessment period further weakened domestic market sentiment.“Amid tumbling lithium chemicals prices in China and anticipation that price declines would continue in the short term, contacts reported that traders in China looked to sell material into the seaborne Asia market to capitalise on the price premium present in those markets.“This depressed both carbonate and hydroxide spot prices on a CIF Asia basis.”What is all behind this?Over at * we like to dig a little deeper. So we spoke to Fastmarkets senior research analyst Chandler Wu to get his take on why the Chinese market was falling into a funk.It’s a mix of a couple things, Wu said.On the demand side China’s sales growth for new energy vehicles has not been as strong as in 2022, owing in part to concerns from the Chinese economy and weak consumer spending.On the supply side the northern hemisphere summer has seen a ramp up in production from brine operations, while higher prices have temporarily brought high-cost supply, which shut down in April, back into the market.“If we use the growth rate of the LCE (lithium carbonate equivalent) minus the growth rate of the EV market, you will see that the spread is widening,” Wu said.“So in this case you can see that the EV market is lower than our expectation.“It’s still very good, I mean, 20 per cent or 30 per cent growth within China. But if you compare to the last year, 2022, it’s lower than our expectation.“If we talk about lithium production supply, up 30 per cent, if your EV market growth rate is lower than 30 per cent, the price will go down – it’s the logic.“Also in the summertime, you can see that a lot of LCE is sourced from the brine because that’s highly connected to the temperature, so you can see that the production of their sea is higher in the summer than in the winter.”Wu said a weak real estate market in China and youth unemployment were also adding to lower consumption rates for new energy vehicles.Visit *, where ASX small caps are big dealsSpodumene prices remain highShould this be a major concern for Australian lithium producers?Not necessarily and not for all of them.Australian miners are at the low end of the cost curve and continue to see strong demand for their primary product, spodumene concentrate.While chemical converters and higher-cost swing production in China may be facing pressure on margins, current 6 per cent Li2O prices are in the mid-$US3000s on spot.That provides strong enough margins for Australian miners to deliver grades well below the benchmark 6 per cent standard and still make strong profits.Why has spodumene remained sticky while converter margins have been falling?“If we talk about … the capacity of the mine and the capacity of the smelting facilities we can see that the mine is still deficient here currently,” Wu said.“This is the redistribution of profit in the lithium supply chain.“Mines occupy the majority of the profit margins, but if we take one years ago, it’s a different story, the processing part takes the majority of the production profit margin.”Wu compared it to the process several years ago when iron ore producers Rio Tinto (ASX:RIO) and BHP (ASX:BHP) saw profits rise as margins moved from China’s steel mills to the Pilbara majors.In recent months we’ve seen numerous ASX-listed lithium miners walk back or revisit downstream processing plans, notably Mineral Resources, which cancelled a deal to invest in two lithium hydroxide plants in China in favour of exploring midstream salt production in WA for sale to European and American converters and OEMs (original equipment manufacturers).Pilbara Minerals has approved a $105 million demo plant to create an 18 per cent Li2O lithium phosphate using electric calcining technology developed by Calix (ASX:CXL), while Liontown Resources (ASX:LTR) MD Tony Ottaviano indicated part of a strategy to study downstream plans with Japanese trading giant Sumitomo would be looking at whether it would be best to beneficiate ore from its under-construction Kathleen Valley mine into salts onshore before further refinement overseas.What’s next for lithium?With lithium’s latest rally now in the books, what could be coming for the metal heading into 2024?Wu says it is too early to say and would depend in large part on monetary policies in China. One complicating factor for EV sales growth is China reached its 2025 penetration target in 2022.With futures prices falling further than spot, he said prices were still on the “downturn corridor”.Supply is also rising from Chinese-controlled mines in Zimbabwe, like the Bikita mine.Brownfields expansions at established Australian operations such as Pilbara’s Pilgangoora, MinRes’ Mt Marion and the world-leading Greenbushes mine in WA’s South West are also ramping up.This content first appeared on unauthorised investment adviceSUBSCRIBEGet the latest * news delivered free to your inbox. Click hereMore related storiesBusinessHomewares sector results tricky to readRead moreStockheadSpaceX BTC sell off as August turns redRead moreSubscribeSign InSearchHomeMembershipAbout UsContact UsOur News NetworkOur PartnersOur AppsA NOTE ABOUT RELEVANT ADVERTISING: We collect information about the content (including ads) you use across this site and use it to make both advertising and content more relevant to you on our network and other sites. Find out more about our policy and your choices, including how to opt-out.Sometimes our articles will try to help you find the right product at the right price. We may receive payment from third parties for publishing this content or when you make a purchase through the links on our sites.Privacy policyRelevant ads opt-outCookie policyTerms of useNationwide News Pty Ltd © 2023. All times AEST (GMT +10). Powered by WordPress.com VIP