Excellent post, I completely agree with your perspective. The sudden shift in BMI's supply/demand projection is perplexing, especially considering the inconsistency with their prior analysis. Furthermore, there seems to be a lack of reaffirmation in interviews since then. While Macquarie predicts a surplus until 2026, their track record isn't as reliable as BMI's, so I take their predictions with a grain of salt.
In my view, the pivotal moment for lithium pricing is likely to occur in late 2024, driven by the realignment of supply chains prompted by the USA's Inflation Reduction Act (IRA). The Act, which has already excluded the US$7,500 EV subsidy for battery components produced in specific foreign entities of concern (FEOC such as China, Russia, North Korea, and Iran), is set to widen its exclusions in 2025 to encompass critical minerals processed or recycled by FEOCs. Additionally, the subsidy is contingent on 30% domestic or free trade partner sourcing of material inputs, rising to 80% by 2027.
Considering current policies and free-trade agreements, producers in Canada and Chile, along with integrated producers in Australia, stand to benefit. Notably, any China-affiliated supply is excluded, eliminating spodumene from Greenbushes and Mt Marion due to their partnerships with Tianqi and Gangfeng, respectively. Most non-integrated Australian mines may also miss out on IRA subsidies if their spodumene is processed in a Chinese-controlled plant.
Anticipating subsidy eligibility, I foresee a split in the lithium industry into two markets with distinct pricing systems, driven by demand from each market. The US$7,500 IRA subsidy encourages significant price increases in lithium and other materials, as it's economically advantageous for manufacturers to pay higher material prices to obtain the subsidy. A tripling of IRA-eligible lithium prices (to around US$40k per tonne) could be easily absorbed within the subsidy.
So, how does this scenario impact AGY? A crucial catalyst in the medium term would be a free-trade agreement between Argentina and the USA. While Argentinian lithium isn't currently eligible, AGY's product might qualify if it goes to a Korean partner for cell production, considering South Korea's existing FTA with the USA. For South Korean battery cell manufacturers to maintain eligibility, it really depends on how many other battery minerals they are sourcing from non-FTA partners. It will be interesting to see how FTA-partnered nations manage their material input balance.
With various factors to consider, including the upcoming US presidential elections in November, the first half of 2024 may remain challenging. The quarterly results from various lithium producers in the coming weeks might not provide clarity, but I'm optimistic that things will start to turn around in the second half of 2024 as producers adjust their supply chains to meet IRA eligibility criteria.
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