Lithium finds itself in a really interesting spot at the moment....

Lithium finds itself in a really interesting spot at the moment. If we reflect on the last few years there are a few lessons, specifically around narrative. I see a lot of parallels to the nickel industry right now and find myself wondering what the future is for lithium.

The market was told that supply could not possibly respond to the forecast demand, and that the cost curve would shift upwards for many years to come. (Exactly the same as Nickel). What we got was a supply response from the West, the East and Africa which nobody saw coming.

There was a brief rebound after the market considered the durability of this supply response given environmental and quality concerns, combined with a rebound in Chinese Auto sales. Lithium of course is a speciality chemical and given the amount that is required a country simply would not tolerate ecological disaster. The reality is that the products that have come out of Africa and some of China appear to be relatively high quality and governments appear happy to support it. That's where we have recently been. (See Nickel Mines NIC.AX).

We are now in a position, much like Nickel, where the supply that pumps out of Indonesia is now such good quality and so low cost, Australian producers just cannot compete. Indsutry players are crying out for government subsidies and hand outs, but the reality is that the industry is doomed to fail as long as indonesia continues to produce the quality of product at that cost (See BHP, IGO, Panoramic resources etc). Additionally, they are only increasing supply.

We are at crossroads as I see it, as an investor you probably will have one of these two theses.

1. (Short) Lithium cost curve has move structurally lower and there will be no recovery above previous street estimates of $1,200 to $1,500 USD p/t long term average price. So you are short any lithium player priced above $1k USD p/t

2. (Long) You believe that Argentina, Africa and China cannot supply a meaingful part of the industry over the long run and Australia's supply will not be the swing producer. Long term prices will eventually be back above $1,200 to $1,500 USD.

There is a third option, and that is that the short thesis is correct in the short run. Supply is destroyed, but so to is companies like LTR, parts of MIN's operation, PLS shelves expansions, explorers like WC8, PMT, James Bay for LTM are all lost to history. However in the long run some of these operations survive (PLS for example) and they become stronger. However, this will be of little comfort in the short run, as share prices will go much much lower.

In essence, what Im trying to say is there is a real possibilty the lithium price simple doesn't recover to what's reflected in the PLS share price. This is the risk you take investing in PLS and hoping the cost cruve hasnt structurally moved lower.

My ramblings on a wet Ekka public holiday.