The lithium bubble has popped with stunning speed

Production cuts from Albemarle are bad news for Australia’s struggling lithium sector. But the market needs more bad news before it can recover.

What a difference nine months make.

At the start of October 2023, the world believed that US lithium giant Albemarle was set to pay $6.6 billion for ASX-listed Liontown Resources. The lithium market was on fire and Albemarle chief executive Kent Masters had done plenty to stoke the flames, having opened 2023 by declaring the company’s revenue would climb from $US4.7 billion ($7.2 billion) in 2022 to as much as $US15.7 billion in 2027.

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Australia was a key part of Masters’ plans; in addition to buying Liontown, Albemarle was building an ambitious $4 billion plant at Kemerton in Western Australia that would have four “trains” to turn lithium into lithium hydroxide for battery makers in China and beyond.

But Albemarle’s big Aussie vision is in tatters.

Masters abandoned the takeover of Liontown a few weeks later, citing “growing complexities” around the deal after billionaire Gina Rinehart grabbed a stake of almost 20 per cent in the junior miner.

The fourth train at Kemerton was killed off in January. And then on Wednesday night came more bad news: Albemarle will stop construction on the third train at the plant, put the second train into care and maintenance, and instead focus all its efforts on getting its first train, which has been beset with technical problems, up and running.

At current pricing, Albemarle expects its full-year revenue will come in between $US3.2 billion and $US3.4 billion. Its 2027 forecast for revenue of $15.7 billion looks laughable.

That’s the harsh reality here: the supply curtailments announced by Albemarle are exactly what the market needs.

Masters’ retreat – in addition to Wednesday’s cutbacks, Albemarle will conduct a full-scale operational and cost review – is entirely logical given the stunning fall in the lithium price, which sits almost 90 per cent below its peak in late 2022.

But while Masters has spent much of this year declaring lithium prices to be unsustainable, he is now accepting a different reality.

“The market is not improving. It’s actually probably getting a little worse,” he says. “We’re using the term ‘lower for longer’ from a pricing perspective, and we have to be able to operate through that downturn.”

About 300 jobs will go from the Kemerton plant. The job cuts are really starting to add up for the WA resources sector, given BHP’s decision to shut its Nickel West operations, the 700 job cuts announced at Fortescue, the closure of the Ravensthorpe nickel mine owned by First Quantum, and the closure of Mineral Resources’ Yilgarn iron ore hub.

It’s hard not to be stunned by the sheer speed with which the lithium bubble has popped, amid a wider downturn in critical minerals.

In an industry where it takes several years to bring a new project to production, the collapse of a market in 18 months is very difficult to prepare for, or adapt to. Arguably, Masters has actually done a pretty good job of cutting Albemarle’s cloth to suit the shrinking market; the difference now is he has had to accept that the recovery just isn’t coming any time soon.

Faith in the ‘demand story’

Of course, Western Australia has been through periods like this before and will know the rhythm of these downturns; the closing of marginal projects, the consolidation of second-tier players, the reduction in supply that eventually brings commodity markets into balance.

And that’s the harsh reality here: the supply curtailments announced by Albemarle are exactly what the market needs.

Ben Cleary, portfolio manager at the Tribeca Global Natural Resources Fund, is an Albemarle shareholder, and has been buying the stock.

He says the company’s decision to raise in March to retire debt now looks very prudent, and he’s supportive of Masters’ latest cost-cutting moves. But what the sector needs now, in Cleary’s view, is a further reduction in supply so the market can find a bottom.

Despite numerous stories about a glut of Chinese electric vehicles flooding markets around the world, and price cuts putting margin pressures on manufacturers from Tesla down, Cleary is more sanguine about the state of EV demand, pointing out that Chinese sales are still growing at double-digit rates.

This accords with Albemarle’s view of the market – it said on Wednesday night that the demand story for the battery mineral remains very much intact: demand between 2024 and 2030 is set to jump 2.5 times, growing at a rate between 15 per cent and 20 per cent a year. The price of a lithium battery pack, Albemarle says, will reach cost-parity with an internal combustion engine by the end of 2026.

The problem here is supply, which continues to enter the market. Goldman Sachs says that even with some supply cuts, the market is headed for a surplus of 150,000 tonnes in 2024 (or about 11 per cent of global supply), rising to 336,000 tonnes in 2025. UBS doesn’t see an improvement in pricing until 2026.

More supply will simply have to come out of the market if we are to see a sustainable recovery.

Cleary says that if Albemarle is struggling to make money with the lithium price hovering around $US1000 a tonne, then other Australian producers, including Liontown, Mineral Resources, and Wesfarmers, would have to be considering their plans. And there’s no way, in his view, producers in China and Africa towards the middle and bottom of the cost curve will be making money at these prices.

Some suppliers will, of course, take a different approach. Cleary was one of many in the industry surprised when leading ASX producer Pilbara Minerals said last week that its production would increase next year, and some producers will probably try and limp through to preserve the skills in their workforce, keep their customer relationships, or avoid the costs of closing and later restarting a project.

There will also be different suppliers with different objectives. Rio Tinto, for example, will produce first lithium from its Argentinian project in the coming months, and chief executive Jakob Stausholm is looking long term.

“I couldn’t care less about what the lithium price is in the next 12 months,” he said, as he delivered the mining giant’s June-half results on Wednesday. “I’m more thinking about how will the market and demand be over the next decade or two, and lithium is necessary in almost any construct of a battery.”

Lithium is a tiny part of Rio’s highly diversified business, so Stausholm can afford to run a little experiment and take an option on future growth. But Albemarle, rival lithium producers and investors like Cleary will be hoping others in the sector adopt a more rational approach.

The easy wins for lithium investors are obviously gone, but Cleary isn’t giving up on the sector. If more production cuts follow Albemarle’s, if prices can find a bottom and if demand picks up, then he sees an interesting set-up, particularly given the market is bearish and lithium stocks are heavily shorted.

A turn in sentiment could be compounded by a rush of short covering. It’s a trade for the brave, but as Cleary says, “You don’t make money in this industry buying stuff that everyone loves.”