Typically I try to avoid using long block of quotes but in this case you really need to read the views of Arcadium's CEO when he talks about the lithium market:
The supply chain is incredibly opaque for everybody, even for us, right? It's long. The signals being sent down the supply chain are off in the far distance, they're happening in Detroit or they're happening in Germany or even parts of China and they're not clear signals and so what we have is a supply chain trying to figure out we know that year-over-year growth in EV sales is about 20% to 25% still was in Q1 year-over-year was 25% higher year-over-year. So we know the growth is there, but there is a lot of confusion around technology roadmaps, there's a lot of confusion over IRA incentives, where Western Automotive are trying to build supply chains.
And so I think you've got the whole supply chain that's kind of a little bit frozen at the moment, and it's kind of sitting back waiting for clear signals about which way to go. I don't believe there was a massive destocking in lithium because I don't think there was ever a real big you know increase in inventory in the lithium space. I don't think we ever really saw in our supply chain customers with more than a couple of months of usable material on the shelves. So there wasn't really much they could do to destock. But what we're not seeing today is people producing cells, producing batteries, producing through the chain for next year's demand, which is what they typically would do. And so it's kind of a little bit frozen.
Now I think another interesting wrinkle, and this is why it's such an interesting, difficult industry sometimes to predict, is there is some pretty big geopolitical factors at work in my view. I think the US and Europe, and we saw it today with the tariffs in Europe, and we've seen it all through the IRA, if you flip it around and say in China, the message you're receiving is the Western world is trying to remove China's advantage in electrification, which is huge, right? It's a massive advantage in the entire supply chain. And the biggest weakness that China has, its Achilles heel, if you will, is it doesn't actually have any lithium resources of its own.
And so the simplest place, and maybe you could argue the same in other commodities, the simplest way to choke off China's leadership is to choke off the supply of raw materials. So not a surprise that they take what may appear to be economically irrational decisions, but are actually quite rational decisions to build their own captive supply chain to start processing very expensive Lepidolite, to start putting a lot of capital into a very inefficient supply chain in African Spodumene. This is really expensive stuff and but what the battery chain is saying in China, what the Chinese industry is saying is, we don't care that that is costing me $20 a kilo just to even make it myself, because I'm getting security of supply and I'm defending myself against some of these broader actions that the West is taking.
So I try and encourage people to not look at Lepidolite and not look at African Spodumene as supply that came into the market. Think about it more as demand that was taken out of the market by captively producing. China is basically saying I don't need to buy as much lithium. And that's where the oversupply comes from. And that's, look, it will correct. It always does. The growth rates are so high. I mean, total lithium demand in 2023 was where we thought it would be in 2025 when we did our IPO in 2018. So in the space of five years, we hit a seven-year target in five years, and it continues to grow at that rate. And it will get harder and harder for low-cost supply to come into the market.
We just think there's a natural tendency, there is a natural path upwards for the marginal producers' cost, and we think the price of lithium is will only creep up even from especially from where it is today. I don't think it'll go over $40. I don't think it'll stay below $20. I think it's just you look at the economics it's difficult to see how that happens."
WR1 Price at posting:
70.0¢ Sentiment: Buy Disclosure: Held
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