This seems a fairly unbiased article on the oversupply issue......

This seems a fairly unbiased article on the oversupply issue...

A lithium reality check

With global production expanding, will lithium keeping charging?

Summary: SQM, the world’s biggest lithium producer, is set to ramp up output from its operations in Chile. The news has hit the share prices of Australian and other global producers.
Key take-out: Investors in the lithium space will need to watch developments closely, but don’t expect overnight supply changes.

A sell-off in lithium stocks last week was not the end of the boom in battery metals. Rather, it was an overdue correction to an overheated market, which still has a long way to run.
The immediate cause of an almost uniform 10 per cent fall in most lithium-exposed explorers and miners was approval for SQM, the world’s biggest lithium producer, to expand production in Chile.
If SQM was able to quickly produce an extra 70,000 tonnes of lithium carbonate a year then there might be a genuine reason for concern about the price of the material. Lithium is the basic building block for long-life batteries used in electric cars, tools, and for storing renewable energy.
But, because SQM produces its lithium at a dry salt lake (Salar de Atacama) high in the Andes mountains, the additional material is unlikely to reach the market for at least five years. That’s because it will take that long to finalise planning, approvals, financing and construction.
There are three other reasons to see the SQM expansion approval as a reason for investors to remain interested in lithium:

• Electric car demand is accelerating, thanks to a combination of consumer interest, government incentives and falling production costs.
• SQM’s expansion had been delayed by political factors in Chile, and with the election of a pro-business president last month the way was cleared. This fact was missed by most investment banks following the lithium sector.
• The next phase of the lithium rush will be a more conventional process, because as supply and demand become more closely synchronised the key measures of success will not be tonnes produced but costs and quality.

The negatives and positives

Uncertainty about what happened in Chile last week has led to conflicting advice, with some investment banks seeing it as a major negative event. Others see it as a non-event, because it either

• Introduces “significant lithium price downside risk” (Morgan Stanley), or
• Does not “threaten near-term lithium market conditions” (UBS).

Investors, after the shock of the SQM expansion clearance, have crept back into the Australian lithium sector.
Leading Australian lithium producers Orocobre, after an 11 per cent plunge from $7.18 to a low of $6.36 last Friday, and Galaxy Resources, which fell by 10.7 per cent from $3.82 to $3.41, have both reclaimed lost ground. Pilbara Minerals, which is scheduled to start production later this year, lost 8 per cent with a fall from $1 to 92c, has also stabilised.
The politics of lithium

The starting point to understanding what happened last week is to take a deep dive into the politics of Chile, all the way back to the military dictatorship of Augusto Pinochet of the 1970s and 80s, a time which deeply divided the South American country.
SQM, which has the full name of Socieded Quimica y Minera de Chile, was (and remains) a major producer of lithium and other materials such as iodine and potassium. Its biggest shareholder, in the process of selling its 32 per cent stake, is the Canadian company Potash Corporation. But effective control has remained with Julio Ponce, a billionaire who is also the former son-in-law of General Pinochet.
Those historical connections mean that SQM struggles when Chile is led by a socialist government, but blossoms when the government takes a right turn, which is what happened last month with the election of Sebastian Pinera – another Chilean billionaire.
The change of government coincides with the end of a dispute between SQM and Corfo, the development agency of the Chilean Government, probably thanks to a political directive. But Chile’s slow reaction to sharply higher lithium prices has permitted other countries to snatch a slice of the market, especially Australia’s hard-rock miners.
A looming price squeeze

The question which investors in lithium stocks should consider is whether there is room in the global lithium market for SQM’s expanded output, because other producers are also boosting production to ride the electric car revolution.
The only answer at this stage is a tentative yes, there will be room, but only for producers able to survive at prices that are likely to be lower for longer.
What’s happening in lithium is a rerun of what happened in iron ore, which enjoyed a spectacular rise to more than $US180 a tonne when Chinese demand exceeded supply. It then plunged to $US40/t before recovering, but only after high-cost mines were squeezed out.
Lithium, in its carbonate form, had rushed up from $US4000 a tonne as recently as 2014 to peak last year at $US20,000/t, before starting to ease as new supply reached the market dominated by Asian battery makers.
Over time, the lithium price is likely to follow a similar path to that of iron ore, sliding to a forecast of around $US8000/t – less than half the peak, but double what it was before the boom.
The impact of SQM

Morgan Stanley, the most worried of the investment banks, said it expected SQM to “aggressively recover market share” lost to new producers such as Australia’s Orocobre, which operates in South America, and the US-based Albemarle, which operates the big Greenbushes mine in Australia with China’s Tianqi.
Warning that the lithium price could fall faster than it had previously predicted, Morgan Stanley said a bottom of $US8000/t expected in 2022 could now occur in 2020.
UBS disagrees. It reckons SQM will only expand output modestly, despite receiving permission for a massive increase in output.
“We don’t believe the SQM deal leads to over-capacity,” UBS said. “By the time SQM lifts output by two, three, or four-times, lithium demand will be growing dramatically to absorb new supply.
“Factoring in a five-year ramp-up for (an expansion) of between 50,000-to-70,000 tonnes a year, our initial view is that the new production might achieve nameplate (capacity) in 2022-23, exactly when the lithium supply/demand balance heads into large deficit as electric vehicle penetration rises strongly.”
Morgan Stanley, with its less optimistic view of the SQM deal, noted that even as the Chilean company reclaimed its traditional role as the global lithium price setter, it was unlikely to destabilise the market. The bank said that in the past, SQM had behaved: “as a disciplined leader, keeping lithium and iodine prices around the marginal cost of production”.
In effect, SQM’s new material will be needed by battery makers, though for Australian investors the most important factor will be to focus on lithium producers able to keep their costs under control – which is precisely the same for all companies exposed to the commodity cycle.