For those that don't follow, an excellent piece of commentary relating to recent price movements.
Let’s talk. Since it is just the two of us, I will say some things I would hesitate to say in public or on social media. Especially since I wrote in my journal on January 1, 2018 that I was going to be “kinder and gentler” on social media in 2018.
We all know that lithium has become a bit of a big deal. One of the epicenters of activity is Perth in Western Australia. Perth is also a favorite stop during my world travels. The former British Empire penal colony has more newly minted lithium “paper” millionaires per capita than any place on the planet. The proud mining heritage of the “wild west” of Oz and coupled with the progeny of penal colony era seems to have created a group of retail investors unafraid to roll the proverbial dice on any company with “lithium” in its name. These denizens of WA have correctly grasped a major investing trend: green energy metals – particularly lithium. Unfortunately, most remain very fuzzy on the details and nuances of their new favorite industry. Wild swings in ASX stocks based on internet and Hot Copperish hype are the norm. Yesterday the rest of the lithium world seemed seemed to fall prey to emotion rather than analysis. Yes, that was a bit of a digression. I will try to stay on task because we don’t have much time today.
Let me cut to the chase so I can take Fiona back out in the snow:
There is no reason for the major lithium related stocks to be “hit” due to fears of oversupply and dropping prices – whether some are currently overvalued is a different discussion we won’t deal with today.
Pundits with limited knowledge are making a big deal of the potential for
oversupply based on: the soon to be announced SQM – Corfo agreement, new projects in Australia coming online and the recent Orocobre announcement of plans to expand and Toyota Tsusho’s equity investment. These items along with the fact that price in China as reported by one media outlet dropped a few percent are taken as evidence that the days of high pricing and tight market are coming to an end. Don't bet on it. The tight market will remain into the next decade. That doesn't mean China prices won't fluctuate wildly at times. Let me spout some lithium heresy: the price in China isn't that important, focus on the price in Japan, Korea and ROW. Before most of you were interested in the lightest metal, we have seen widely disconnected prices before.
My perspective:
The salient lithium price for lithium brine producers outside of China is NOT the price in the Middle Kingdom. SQM’s average price is in the $14/kg range vs $20 plus in China. Yes, SQM sells in China as well as all other key markets but a price drop in China has virtually no impact on their bottom line because of both their geographic diversity and the fact they are not selling in China at the high end of the price spectrum. SQM is transparent in revealing their average pricing based on the way they report. If you take the time to scour the world’s trade statistics (and few do); the price picture becomes even more obvious.
Japan imported more than 16K MT of lithium carbonate in 2017 – greater than 75% came from South America and an average price in the $11 range.
This price will rise in 2018 and is not exposed to the vagaries of the China market. The independent hard rock converters in China buying spodumene on the open market and required to pay 17% VAT on the exports cannot compete at this price.
Japan imported over 17K MT of lithium hydroxide in 2017.
Over 60% of the imports were from China at average prices less than $12/kg. Both Albemarle and FMC (who now has high cost carbonate feedstock based capacity in China) are bending over backwards to supply the Tesla supply chain via Panasonic.
The low price is driven by western suppliers operating in China. Both ALB and FMC will get higher hydroxide prices in Japan in 2018. They should given their current price is several USD/kg below the global average (ex-China) price.
FMC also supplies Japan from the US at below market prices. My point: worrying about the historically volatile pricing in China when analyzing the future prospects of a low cost player like SQM who isn’t exposed to the volatility at the high end of the China market or the foolishness of ALB and FMC in hydroxide shows a complete lack of understanding of how the lithium market works. SQM’s hydroxide price is much more judicious across the globe. They have some upside in 2018 too.
Japan still represents a significant and fast growing piece of the world LCE market as does Korea. If I showed you the data from Korea, the story would be very similar except Ganfeng is smart enough to charge high prices for hydroxide in Korea and let ALB and FMC race to the bottom with low hydroxide price next door in Japan.
I have already written extensively on my thoughts regarding the lithium supply situation. In the next couple years’ new brine capacity coming from South America is limited to whatever ALB can eke out of the underperforming LaNegra II and SQM’s relatively small (15K MT)expansion. Don’t expect more than 25 to 30K MT in the next couple years. Large scale brine supply increases are 3-5 years away.
In the next two years
the market will grow close to 75K MT. Much of this has to come from hard rock or marginal increases in China brine.
Don’t forget lithium inventories are at all time lows and need to be rebuilt effectively adding another significant increment to near term “demand”.
Go ahead and believe RBC or Roskill on supply if you want but before you do, check their track records. Past isn’t necessarily prologue but in this case I think you are safe assuming it is.
For western based lithium chemical producers (SQM, ALB, FMC and ORE) what I have called the
new normal pricing of $12 - $15/kg seems a good bet into the next decade. Of course if Luke and company want to price lower for “strategic” reasons….. Well, as they say: “you can’t fix stupid”. Of course, since it is just us, I will say that – I would never say that publicly.
Since this is just us, I am going to forgo editing this and hope you will forgive me.
