Here's the latest release from Mac Bank on the lithium market (summary page only) - released this morning.
Australian Lithium Miners Tomorrow’s supply today
Near-term supply wave in lithium
As we highlighted in our recent Commodities Comment we see a near-term lithium supply wave building. Supply response from existing brine producers is already accelerating and Australian hard rock exports have bounced back. Off-contract LCE pricing in China has pulled back from its peak and contract prices are showing early signs of weakening.
Australia’s two new mines at Mt Marion and Mt Cattlin are about to begin production and are now targeting immediate expansions. Assuming a smooth ramp-up at both mines, we expect Australian spodumene production to double over the next 12 months.
That being said, global EV sales growth, driven by China, has surprised to the upside. However, at current lithium intensities and battery sizes, global EV production needs further ~1.6m pure electric vehicles to be sold to absorb the supply increase. Global pure EV sales in 2015 were <450k, with Chinese sales at 247k. Even in the context of China’s rapid EV growth, it seems unlikely this required growth will materialise so quickly, and this sensitivity doesn’t factor in production increases from elsewhere.
Outlook
We are entering an interesting phase for the Australian hard rock lithium sector. It seems that incumbent producers might be more agile, and more motivated to keep new supply out of the market than expected. In our view, how pricing plays out in the near term will be dependent on the success of MIN/NEO and GXY. Should things go smoothly, then the turning point for lithium pricing could arrive earlier than previously expected. In the medium term, we expect the higher production from the two new mines to now satisfy demand to 2021, previously 2019.
Longer term, we remain positive on the outlook for both EVs and the LiB sector more broadly. We understand that significant conversion capacity is being built in China, and continue to believe that China will be the key driver of demand. But the low barriers to entry for hard rock mines and the apparent ability of existing producers to ramp up suggest to us that supply will always be able to meet or even outstrip demand.
Orocobre (ORE AU, A$4.32, Outperform, TP: A$5.00, Andrew Hodge) remains our preferred pick in the lithium sector as it is already in production and has been able to realise current off-contract pricing. We view MIN/NMT’s Mt Marion project as the largest and lowest-risk new addition to hard rock lithium supply. We remain positive on GXY’s Mt Cattlin project, which we expect to be in production before the end of the year, but we believe the stock is still factoring in a premium to our long-term price forecasts. In light of the significant and near-term expansion plans for Mt Marion and Mt Cattlin, we think the outlook for PLS and AJM looks more challenging.
The key risk to near-term price expectations is the potential for delays in the commissioning of Mt Cattlin or Mt Marion, which is likely to see a resumption of stronger pricing. We’d expect this to be a short-term phenomenon as we believe technical issues are likely to be resolved quickly. Given the rapid response we’ve already seen from incumbent producers, the race to production has now become a sprint.
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