Yesterday JPM started initiated coverage of the Lithium Sector in Australia with a reasonably lengthy report. Despite only covering MIN, ORE, GXY, KDR & PLS (GXY being their top pick) its encouraging to see that they have taken time to look at the dynamics of CORFO/SQM and what that really means for the longer term outlook - they are much more in the camp of Joe Lowry and I think shows that over time the Research Houses (excluding their obvious conflicts of interests) out there will make more reasonable assumptions around the supply/demand outlook moving forward.
FROM JPM..
Lithium market outlook
The lithium market remains very tight, despite some seasonal demand weakness
around Chinese New Year. Spot battery-grade pricing in China has fallen 6% from
its December 2017 highs, related to i) softer demand due to seasonal plant shutdowns
for cathode manufacturers and ii) increased supply from domestic producers (Tianqi
and Raifu Lithium have both restarted carbonate plants in the last two months).
In the seaborne market, realized prices for major South American producers (ALB,
SQM, FMC, ORE) continue to grind higher, and we expect the convergence between
Chinese domestic prices and seaborne pricing to continue. We believe the current
pricing spread for battery grade material is around US$7,500/t LCE, or 50%. The
long-term price spread between the two markets should simply be the 17% Value-
Added Tax that China applies to imported volumes. To arrive at that long-term
spread, we think a combination of further price normalization in China along with
further improvements to seaborne pricing will occur.
Full effect of increasing supply not to be felt until 2H 2018
The first wave of new hard rock supply has been ramped up and absorbed by the
market. Greenbushes has pushed export volumes from 450ktpa to 700ktpa in the last
two years and Mt. Marion and Mt. Cattlin are both exceeding original production
targets. We believe concentrate demand in China is still high, and domestic
production has increased in the last few months.
There are three new Australian hard rock projects ramping up in the first half of
2018; PLS’ Pilgangoora Phase I project, AJM’s Pilgangoora project (which
neighbours PLS) and TAW’s Bald Hill operation. At full production run rates, these
three projects are expected to export 600ktpa of concentrate, adding to the existing
1Mtpa of Australian exports. While shipments from these new assets may commence
in 2Q 2018, we look at how the market responded to new supply from Mt. Marion &
Mt. Cattlin and assume at least a six-month delay before new hard rock supply has an
influence on the battery-grade market.
DSO remains the key variable
MIN has now exported 2.5Mt of Wodgina DSO, grading roughly 1.5% Li2O and
containing 86kt LCE. MIN has said that its technical team continues to support its
customer base to commission new concentrate plants in China, with most customers
achieving +60% recoveries during testing.
We model the lithium market in three sub-categories: i) battery grade market,
ii) concentrate market and iii) DSO market. As a result, we can apply timing lags to
DSO imports to factor in the gradual ramp-up in DSO processing that should occur
through 2018. In our view, the speed of this ramp-up is the most material factor in
forecasting short-term market balance and pricing outcomes.
SQM news flow an inevitable reality
The news in early January that SQM and CORFO had reached an agreement
enabling SQM to increase production volumes from the world-class Salar de
Atacama project in Chile triggered a broad sell-off in global lithium equities. It will
take SQM 5-8 years to increase production rates from 48ktpa LCE currently to over
100ktpa LCE, so SQM is not about to flood the market. But the SQM news is a
timely reminder that the lithium market is just like any other commodity market and
supernormal pricing will deliver a supply response.
In our view, the equity sell-off has re-based valuations and delivered a second round
of opportunities for investors to gain lithium exposure. We continue to believe the
best investment opportunity lies with companies that control low-cost projects with
expansion potential, with a strong preference for battery-grade product quality.
JPM lithium price forecasts
We present our price forecasts for key lithium products below. Our long-term price
assumptions start from 2023. We assume that Chinese spot prices retrace while
seaborne contract pricing continues to rise until the two markets are closer to
equilibrium (ex the 17% VAT applied to Chinese imports/exports). We also assume
that lithium hydroxide maintains a positive spread vs. carbonate pricing given that
some carbonate continues to be converted to hydroxide to meet demand.
(20min delay)