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Lithium 2019: My Take

• Published on February 3, 2019

Joe Lowry
Joe Lowry

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As we move into the second month of 2019, all indications are that my 2025 lithium demand forecast needs to be increased – perhaps substantially. That exercise happens in March once 2018 data is fully confirmed and I have had a chance to get the latest insights from all parts of the lithium supply chain from my Q1 Asia tour.
Over the last two weeks, I had more than ten expert calls with investors from three continents. My message is simple – I don’t expect a turnaround in the low prices of most lithium stocks until late in 2019. Despite all the bullish e-mobility and ESS announcements, the current negative sentiment will be hard to shake in the short term for two major reasons.
1)   There is still a strong belief in what I like to call the “over-supply” myth. Preliminary numbers from the China Lithium Association indicate an increase of ~ 35K MT LCE of production of lithium chemicals from hard rock and brine in the “middle kingdom”. These numbers include carbonate, hydroxide and chloride. It is pretty clear from the preliminary data from South America that SQM, ALB, FMC/Livent and ORE exported in total less than 10K MT more in 2018 than they did in 2017. The supply of lithium chemicals seems to have increased in total by < 45K MT on a production basis.
Supply growth was not substantially different from market growth. Hardly a “tsunami of supply”. I direct you to posts by my young friend Alejandro Hess if you want to drill down into details in Chile. My Argentina information comes from contacts in both Catamarca and Jujuy which I cross check with what the companies say.
Yes, spodumene concentrate production in Oz is on the rise. Prices of concentrate will fall and the cost curve will be impacted but not in a significant enough manner to drive China pricing to single digits especially for battery quality material which in the long run is all that matters. If you want to compare low quality spot price material with battery quality product you need to add the cost to upgrade.
Southbound spodumene pricing is not a major event for the global lithium chemicals market. You need to look at how much of production is in the hands of converters who aren’t part of the oligopoly controlling spodumene in China. Spodumene has technically been in oversupply vs chemical conversion capacity for several years but when you have a functioning oligopoly it doesn’t matter too much. Pay attention to lithium chemical production. Obsessing over spodumene concentrate supply is a rookie mistake.
Hardly anyone I speak with regarding the market questions robust lithium demand growth but the “oversupply myth” still has traction. When will that change? My guess is that by Q4 of 2019 it will become obvious that production in the Atacama is increasing but in an amount that is almost meaningless vs "great expectations". Chemical production in China is more opaque but a northern turn in the spot price before the end of 2019 will confirm it is time to put the "significant oversupply" story to rest.
2)   The second reason for negative sentiment is the focus of industry newbies and certain irresponsible companies reporting price with a focus on the so called China spot price. I am really tired of this topic so I will just say the best “free” indicator of the global pricing trend is SQM’s reported average price each quarter. As long as that price is in low double figures, life will be good for the “Big 4” producers. I also pay close attention to the multiple prices Benchmark Minerals publish.
To close out the topic, I don’t expect negative sentiment to turn until late 2019 or maybe as late as 2020. Make no mistake lithium’s best days are ahead and a wise investor buys low - 2019 represents a continued opportunity. Of course, this is not investing advice but it is common sense.
So what lies in store for the “Big 4” and top juniors in 2019?
SQM: a transition year with a change (at least cosmetically) of leadership. Watch the Atacama brine leader closely. I expect a year or two of significant underperformance vs the high expectations placed on them by Morgan Stanley and others. SQM can’t be blamed for those expectations but the market will likely take note of shortfalls. Long term, SQM will continue to “print money” in the lithium business even with the significant royalty they pay to Chile.
Ganfeng: my favorites will continue to do well as they ramp up major capacity additions and benefit from their multiple deals with hard rock players. Those who continue say Ganfeng is NOT vertically integrated really don’t understand their strategy. If you can buy a small interest in the cow and get a disproportionate share of the milk, it seems like a good idea to me. To be clear Ganfeng has a great portfolio of ownership interests in both hard rock and brine from Mt Marion and Pilbara to Cauchari and even “soft rock” at Thacker Pass via their ownership interest in LAC. Does owning less than 100% of an asset mean you are not “back integrated”? I don’t think so.
ALB: The waning “lithium superpower” with ownership of the world’s best brine and hard rock resources has begun “de-worseification” with their $1.15 billion investment in Wodgina. I accept many think this was a great “defensive” move. I think it was simply a very poor choice especially in light of how much upside their existing assets should be giving them but have failed to because of their chronic poor project execution. The world certainly doesn’t need all the hydroxide capacity they plan to bring “late to the party” via Wodgina as both Ganfeng and Tianqi have huge head starts on them. The growth of 8:1:1 cathode (requiring hydroxide) has been greatly exaggerated. NCA (Tesla) cathode also requires hydroxide but with all the recent capacity additions the supply is adequate.
Tianqi: As a partner in the world’s best hard rock asset, they are well positioned but likely will have an extended started up at their new hydroxide plant in Oz. Their investment in SQM doesn’t give them any control of the output so they are really still a “one asset” major. I expect Mr. Jiang to further expand his asset base in 2019.
All the “Big 4” will prosper in the coming years it is simply a matter of degrees.
The next tier:
Livent: I don’t want to beat the horse to death but when a company is at the low end of the cost curve in carbonate and chloride but focuses on their legacy leadership in hydroxide where they NO LONGER have a quality advantage and certainly are NOT the low cost producer it is a head scratcher. Action rather than talk about expanding on Hombre Muerto should be the order of the day in 2019. No reason to go “tire kicking” hard rock projects in Oz – for Livent, the Australia ship has sailed. From my perspective, it would be better for the industry and shareholders if Livent was acquired or combined.
ORE: expect more of the same until they are acquired or combined with another company.

Galaxy: Mt Cattlin’s Brief “Day In The Sun” Is Over. Life Gets Hard For A High Cost Producer When They Are No Longer The Only Excess Capacity On The Market. After A Brilliant Deal With The Sal De Vida Tenement Sale To Posco; The Question Becomes When Will Gxy “Do Their Business” In Catamarca. Continued Dithering May Lead The Catamarca Government To “Get Them Off The Pot”.

LAC: 2019 is about execution at Cauchari and having a great partner like Ganfeng helps.
Back in Catamarca – I don’t want to forget Neo Lithium. I look forward to visiting the project once the pilot plant is operational and will reserve further comment until that happens.
In Oz – it was great to see Pilbara’s execution and the beginning of ramp – up. I expect to see continued progress (via their excellent Instagram account) in 2019. Altura had a bit of a harder time but hopefully will also progress in 2019. Both companies are in the Ganfeng led Lithium Star Alliance now. Mt Marion continues to progress towards a dominant balance of 6% vs 4% production. This is Ganfeng’s last full year of 100% offtake which will likely make for some interesting discussions with partner Min Res.
ROW: From my perspective the most interesting play is Sigma in Brazil. Time will tell.

In 2019, the Global Lithium Podcast will continue to bring updates directly from top people in the industry. We will again be recording episodes from Argentina, Australia, China, Chile, London, and the US. We will probably add a couple new stops. Time will tell. It is still shocking that our shoestring operation has had well over 100,000 downloads.  
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