Here, for me, is the money shot from the interview of the gent...

Here, for me, is the money shot from the interview of the gent from Arcane Capital Advisor, YJ Lee. Could spend a month unpacking all the angles flowing from it.



A couple of observations:

• the - reasonable in my view - excuse given by the likes of RK Equity for missing the oversupply of lithium in the last year or so was that they had no or little visibility of the Chinese lepidolite production or Chinese production in Africa. YJ Lee claims that his team looked behind that curtain and included a bottom up analysis of China and Africa in their analysis of Australia and North and South America. They only had access to info made public but this is an enormous improvement on other analysis. My guess is that YJ's team had obvious linguistic and cultural advantages over the gweilo analysts (yeah, I know, not a Singaporean term).

• I'm really shocked by how fragile lithium production and sales from South America is showing in this projection. I'm assuming almost all South America production is currently from brine and that even when Sigma comes on stream most of the production from South America will remain from brine. My long-held assumption was that a key advantage of brine production over hard rock production was that brine had much lower opex and could continue operating profitably even when the lithium price sinks. But the data in that chart suggests otherwise. It suggests that the brine operators behave procyclically in that when the lithium price drops they reduce production just as the hard rock operators do: they all go into hibernation rather than the brine operators making the best of their opex advantage. Certainly Arcadium is behaving that way by slowing its brine development projects in Argentina but I blame the investment banker Arcadium has as its CEO for seeing the risk rather than the opportunity in the low lithium prices.

• I'm also a bit taken back by how production of upstream lithium in china - noting this chart is of lithium mining, not lithium processing - seems so resolute. One argument that I've heard - from Ken Brinsden among others - is that China is throwing everything they have at producing lithium but seeing they don't have much in the way of lithium resources they will quickly run out of lithium, whether it be spodumene, lepidolite or brine, to feed into its processing plants. When that happens, so the argument goes, the Chinese downstream operators will have no choice but to go back to paying overs for Australian spodumene. But going on YJ Lee's chart Chinese production of lithium raw material stays strong at least out to 2030. Note that YJ has tagged the chart with the warning that the numbers have not been risked. KB has made the point that much of the Chinese lithium production sits at the top right of the cost curve and assuming China is mining its best lithium deposits now maybe by 2030 China will only have left high cost low quality material that will be well out of the money. If that is the case then without Chinese government subsidies much of the Chinese production shown in the chart will simply not happen.

It would have been perfect if they had built into the chart a line for projected demand for upstream lithium but as it is it is probably the best single bit of analysis I've seen this year. I think the main take-away from YJ's analysis is that the market may be underestimating the demand out to FY30 and overestimating the supply. Plenty of the lithium bulls have argued this to be the case but their disadvantage was they had no idea what the Chinese were up to with resources in China and Africa. YJ and his team may well have peered under that cloak so kudos to them and many thanks for sharing their analysis.