Lithium Supply Revisited
A new year for the lithium market has already begun to spark fresh concerns about oversupply, but despite the ramp up in new operations major supply chain questions linger.
A furore around anticipated new supply engulfed the lithium market in early-2018, however through the haze of Chinese lithium price declines, massive oversupply concerns were eventually dispelled.
Incremental new volumes have undoubtedly reached the market throughout 2018 but accompanied by continued growth in demand the industry remains finely balanced as we fast approach the age of the battery megafactories.
As Benchmark has said for some time, the road to new lithium supply is long and will be paved with challenges and delays. None of the new production to come into the market last year has been without its difficulties.
Now, with fresh concerns emerging over the rate of new supply entering the market moving into the New Year, Benchmark examines the difficulties that still lie ahead for the industry as we close in on the 2021 tipping point for battery demand.
2018 REALITY CHECK
Supply expansions in 2018 were slower than expected by many at the start of the year. The ‘tsunami’ of new supply forecast by some has turned out to be little more than a changing in the lithium tides.
In terms of feedstock supply, Chilean brine producers SQM and Albemarle continued to lay foundations for increased extraction rates in 2018. But as is the nature of brine evaporation, this process takes time and has been hindered further by conversion delays.
Albemarle continues to push La Negra II towards full capacity and SQM has hit technical obstacles at its new conversion facilities that are set to delay its target capacity of 70,000 tpa LCE capacity by the end of 2018.
The bigger expansion from brine – and what threatened to swing the market into excess supply throughout the year – was domestic Chinese production from the Qinghai region.
Benchmark analysts visited these operations to get an on-the-ground understanding of the situation and while each company has outlined plans to triple or quadruple capacities over the coming 3-4 years, it is clear that the technical challenges related to the high magnesium concentration in the region are yet to be overcome.
Across the ten producers in the region, only an additional 5,000-10,000 tonnes of material found its way to market, much of which only reached technical grade specifications. This meant a large proportion was either reprocessed (adding cost) or converted to hydroxide to meet the growing demand for nickel rich cathode technologies.
Away from brine, and spodumene producers also demonstrated that they are not immune to the time delays of bringing new supply to market.
The class of 2017 – Mt Marion and Mt Cattlin – continued their ramp up for a second year, increasing volumes and improving grade. These expansions have allowed for increased conversion rates in China this year but have not provided significant volume increases on 2017 in LCE terms.
Mt Cattlin is on track to produce over 160,000 dmt spodumene in 2018, while Mt Marion’s output increase of 52kt on 2017 (taking production to a total of 428kt) has been quickly absorbed by offtake partner Ganfeng’s new lithium hydroxide facility.
Meanwhile, Albemarle and Tianqi made big statements on upcoming expansions of Greenbushes – a resource which will be tested by the massive conversion facilities each of its owners are planning in Western Australia, with Tianqi due to begin operations in 2019.
As for the raft of new spodumene producers due to enter production in 2018, startups have proved slower than expected.
Alliance Mineral Assets led the way with first shipments in June, however, the delayed plant commissioning of its offtake partner, Jiangte Motors, means little volume has found its way to market.
AMG ramped up commissioning at its Mibra facility in Brazil towards the end of Q2, however, first concentrate shipments only began at a similar time to the other Australian newcomers Pilbara Minerals and Altura Mining in October.
Together these four new operations are on track to produce over 20,000 tonnes LCE equivalent of spodumene concentrate by the end of the year. But when factoring in shipment times, testing and qualifitcation, less than half of this found its way to market by the end of 2018.
This material will only begin to have an impact throughout 2019, however, major questions remain about how quickly chemical quantities will reach the market.
CONVERSION CONSTRAINTS
The introduction of 4 new spodumene operations in the space of 12 months is unprecedented in a market which prior to 2017 only had one operating mine.
A new generation of spodumene operations have been raced into production in response to the large deficit in feedstock material that began in late-2015 and sparked the industry’s biggest ever price spike.
While these new operations have addressed the short-term needs of the conversion market, their rapid development has come at a price: dependence on offtake agreements and partnerships which will tie in the majority of their production for the foreseeable future.
Of the now six spodumene operations that have entered production since 2016, only Galaxy Resources began production without all of its nameplate capacity tied to offtake. However, even Galaxy was unable to fend off offtake interest for long, and in late-2017 committed 100% of its production to 5 undisclosed offtake partners.
Entering 2019, 100% of spodumene capacity is either tied to offtake or fully integrated in the case of Greenbushes.
This market structure has implications for the chemical volumes that will find their way to market in 2019, and raises questions about availability for non-integrated converters.
If all producers were to meet their 2019 target capacities, there would be over 2m tonnes of chemical grade spodumene concentrate entering the market next year.
If you take this assumption one step further and assume that all of this material was consistently produced at 6% grade, that alone would equate to over 250,000 tonnes of lithium carbonate equivalent (LCE).
What’s more, over 62% of this feedstock would be controlled by three of the world’s top four lithium chemical producers – Albemarle, Tianqi and Ganfeng.
SPODUMENE STEP CHANGE
This narrow supply structure poses two questions for an industry seemingly diversifying its supply chain, but still heavily dependent on a small group of gatekeepers to the chemical supply chain.
Firstly, will these converters have the capacity in place to process this amount of material into battery-spec lithium chemicals?
For Albemarle and Tianqi to convert all of the material from Greenbushes without the use of tolling contracts would require the former to successfully double its conversion capacity in China, and the latter to achieve its ramp up ahead of schedule at its new hydroxide facilities in Western Australia.
For Ganfeng, a company that has cemented itself at the centre of spodumene expansions, it would have to achieve a threefold increase on its production in 2017 to convert all of this material.
Assuming the industry majors are able to reach these lofty targets, a second question emerges around which companies will be positioned to convert the remaining up to 790,000 tonnes of spodumene concentrate.
Four of the spodumene offtakes – accounting for almost 40% of the remaining material – are with companies that do not have existing conversion facilities and will rely on tolling contracts to produce the chemicals needed for the cathode/battery applications.
The balance will be sold to tier 2 or 3 producers, eager to build market share, but the majority of which have been unclear in the exact timelines for their plant expansions due to absorb this material.
As a result, even if the ramp up of new spodumene sources were to be successful, there is a strong possibility of a bottleneck in conversion capacity – especially for the high spec material required by the battery market.
While a bottleneck in conversion capacity remains a distinct possibility, the reality of new spodumene production – and mining in general – is that often new projects fail to reach target volumes or specifications in year 1.
Even in the most successful ramp ups, you can rarely hope for more than the roughly 80% capacity utilisation rate achieved by Mt Marion and Mt Cattlin in their first full year of production.
Applying this favourable logic to the spodumene newcomers, and factoring in a proportion of below 6% output which will undoubtedly enter the supply chain as concentrators refine their processing, there is likely to be less than an additional 80kt LCE equivalent enter the supply chain in 2019.
Again, whether this finds its way through to the chemical market – and at what specification – remains a critical question and is likely to reduce this number further, but it is clear to see that even in the most favourable of ramp-ups, production from spodumene is only likely to take a step forward rather than a leap into the oversupply abyss.
What’s more, with cathode requirements in transition, the direction of this material into the market – either in the form of carbonate or hydroxide – will have big implications for the direction of the industry in 2019.
CARBONATE VS HYDROXIDE
How the market will respond to another step change in supply hinges largely upon the requirements of cathode and battery consumers at the centre of market demand growth.
As well as additional lithium units from spodumene, brine expansions will begin to have a bigger impact as SQM refines its new conversion plants and Albemarle accelerates its Wave II expansions in the Atacama.
A trend which emerged in 2018, and will undoubtedly continue into 2019, is opposing cost curves for brine to lithium carbonate vs spodumene to lithium hydroxide production.
As the spodumene-to-hydroxide supply chain strengthens with new entrants and conversion capacities, the market balance will hinge largely on the continued shift towards high-nickel cathode
Although the energy density requirements of China’s EV subsidies meant there was a concerted push towards hydroxide containing chemistries in 2018, Chinese producers and policies have withdrawn from this aggressive shift in recent months – strengthening the outlook for chemistries that can employ either lithium carbonate or lithium hydroxide feedstocks.
In addition, the continued premium for lithium hydroxide moving into the new year may see a more balanced approach to hydroxide chemistries in the short-term.
Longer-term, the implication of the new spodumene supplies is that lithium hydroxide prices will most likely converge with carbonate and cause an adjustment in the pricing dynamics that have defined the past three years in the market.
Regardless of this pricing development, what is clear is that there is a still a long way to go to reach the 1m tpa lithium threshold the industry is expected to exceed by 2026.
Even if the market moves into excess in 2019, battery demand dictates that supply and demand will be finely balanced for the foreseeable future.
So while the addition of new capacity in the market guarantees a strong foundation for demand in the age of the megafactories, the journey for lithium’s supply growth has just begun.
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