Here are the main points from Peter Hanna why this is...

Here are the main points from Peter Hanna why this is happening:

1. Perhaps most obvious is the resurgence of Covid in China and a return to strict containment policies. Indeed, plotting the week-on-week price change of domestic lithium carbonate shows a notable inverse correlation with the 7-day moving average of new Covid cases in the country. Given that several key battery and EV manufacturers have been forced to halt or cut production amid widespread lockdowns, it's unsurprising that demand for spot cargoes of lithium has waned.

2. Market sentiment in China had been wavering even before the uptick in Covid cases started to sharpen in severity. In a seminar on March 16/17, China's Ministry of Industry and Information Technology (MIIT) called for stabilization of lithium prices and a return to more "rational" levels. It is of course difficult to envision such comments exerting any long-term influence on lithium prices, but we have seen from other markets that, at least in the short-term, such rhetoric can be effective in denting sentiment. Certainly in the domestic lithium markets, participants became warier in the wake of these comments, with even the most bullish sellers more hesitant to raise offers.

3. A significant source of China's domestic lithium supply are the brines of Qinghai province, where production sees a seasonal dip during the winter months due to the cold weather. An increase in output is always expected moving into Spring, so buyers have for a few weeks been reassuring themselves that the worst of the market tightness could, at least for the next few months, be slightly eased.

4. Chinese market participants have long been more exposed to spot price ebbs and flows than participants in other regions, who have traditionally locked in more volumes under fixed-price term contracts (much of which is still being shipped to them at a fraction of current spot price levels). This might help explain why seaborne spot prices, particularly for hydroxide, have been more resilient - the dip in Chinese demand having been readily soaked up by international customers with both the will and the means.

Comments from Fastmarkets forecasting team:

"For now, we do not think we have seen the peak in Chinese prices, and we see the pullback as a temporary phenomenon." They also write that while "domestic EV output is expected to fall in April ... companies have expressed that they are preparing to make up for lost volume", setting the stage for a potential bounce-back in both demand and prices.

As we all know, the energy transition driving demand for lithium-ion batteries is an impelled phenomenon, driven by government mandates and increasingly public will. Following the widely-publicized delay in investments, we appear now to be at a stage where more lithium supply can effectively create its own demand.

With the lithium market expected to remain in deficit for a number of years into the future, it's likely that prices will stay primarily 'opportunity-cost-controlled' for some time. This does not mean that we won't see temporary downward price moves in response to excessive margin pressures, nor that we won't eventually see this cycle turn. But it does mean that for the foreseeable time frame, any dips should generally be well-supported, and new supply readily absorbed.

It's an analyst's job to try and answer the tricky question of what demand for a product will be this year, next year, the year after and beyond. But in lithium, for the next few years at least, a cheat's answer (and a good one) to that question might simply be: "however much can be supplied!"