COMMENT: Little room for established lithium producers to ignore China

Ahead of Fastmarkets’ Battery Materials 2019 conference in Shanghai, Fastmarkets looks at use of lithium in next-generation vehicles and other battery uses, as well as soaring prices, which have spurred interest in lithium and boosted its importance in recent years as a battery material.

In June 2016, the spot price in China peaked at $27 per kg, more than three times the global contract price, according to Fastmarkets*. The price jump created the need to better understand this fast-paced market that, since end of 2015, has been undergoing constant change.

Subsidy policies in China, lithium supply and demand, the breakthrough of lithium spodumene, price volatility, increasing investment by Chinese companies in the sector and, most recently, delays in contract negotiations have been among the topics most widely discussed in the market in recent months.

Uncertainty generated by China’s subsidy policy
The electric vehicle (EV) incentive regime in China has been a leading driver of the country’s battery industry, boosting the consumption and production of lithium compounds and transforming the country’s price dynamics.

The Chinese government is likely to phase out all subsidies by 2021 but, until then, the policy is likely to focus on promoting the production of pure EVs with high-nickel-content batteries that have higher battery densities, enabling longer driving ranges.

Still, the uncertainty created by anticipated changes in this policy has caused a delay in lithium contract negotiations. When combined with lower spot prices in China due to domestic oversupply, this has led to reports that companies have stalled about signing new deals, or a shift in procurement strategy in China over the past four months.

Shift in procurement strategy
Battery makers in China have altered their preference and now negotiate prices every month or every three months, because Chinese spot prices are lower than the higher longer-term contract prices proposed by established producers.

Fastmarkets assessed China’s battery-grade lithium carbonate spot price at 73,000-81,000 yuan ($10,780-11,961) per tonne on February 14, which is less than the $12.50-15.50 per kg paid under contract cif China, Japan and South Korea.

Source: Fastmarkets

Price swings in China could become the norm in the next few years, because prices are responding to a different price dynamic, proximity between producers and consumers, and a more direct effect of supply and demand for lithium compounds.

Established producers cannot ignore the importance of this fast-growing market. Lithium chemical conversion and battery production are both expected to result in significant volumes from this country.

Little room to ignore China
Established producers may decide, as a short-term measure, to sell material into China’s neighboring countries, such as Japan and South Korea, to maintain higher long-term contract prices. But according to battery makers in Asia, this is an unsustainable strategy in the long term.

Global spodumene production increased to 191,050 tonnes of lithium carbonate equivalent (LCE) in 2018, from 59,450 tonnes in 2016. And world brine production totaled 148,400 tonnes of LCE in 2018, up from 140,000 tonnes last year, according to Fastmarkets’ research team.

China is the world’s major converter of lithium spodumene and should add lithium units to the global market more quickly than other global brine operations, and at a price that will respond to the dynamics of the Chinese market.

The increase in production of lithium compounds globally, but particularly in China, led to a mild oversupply in 2018 of more than 36,000 tonnes of LCE, according to Fastmarkets’ research analysts.

Source: Fastmarkets

China’s domestic battery manufacturing capacity accounts for 65% of total global capacity, according to Bloomberg New Energy Finance (BNEF), making the country the world’s largest battery producer.

Although BNEF expects there to be a fall in China’s share of global manufacturing capacity to around 60% by 2021, its capacity will continue to increase over that period – in gigawatts terms, to 380GWh from 113GWh at present.

These two factors will increasingly expose established lithium producers to the Chinese market. In the long term, if established producers want to maintain their global market share, they will need to show more price flexibility in negotiations.

The global market share of lithium production in China will also mean an increase in China’s influence on pricing across the globe and higher volumes of exports from the country.

China as a major exporter
Toward the end of 2018, China became an exporter of lithium carbonate because of the greater availability of material in China as well as lower prices. The country was typically an importer of the material.

This competitive advantage – due to the price gap between the lower Chinese domestic market price and the global market – boosted the country’s exports of lithium carbonate.

China exported 11,131 tonnes of lithium carbonate in 2018, more than seven times the volume of 1,497 tonnes in 2017, mostly to South Korea, Japan, Russia, the United States and Germany.

In the same year, China consolidated its position as an exporter of lithium hydroxide, exporting 27,279 tonnes of lithium hydroxide, up by 40.74% from 19,383 tonnes in 2017.

But although prices have softened in China due to oversupply, the fast growth in demand that is expected in the years ahead could push prices in China upward, diminishing its price competitiveness.

Growth in China’s exports, in the domestic battery industry and in investment by Chinese companies will strengthen the country’s influence in the global market as a producer of lithium compounds and as a price-setter.

Chinese lithium producers such as Tianqi Lithium, Jiangxi Ganfeng Lithium, Sichuan Yahua Group, Shandong Ruifu, Sichuan Brivo Lithium Materials and Qinghai Dong Taijinaer Lithium Resources are set to take an important role.

To hear more about the lithium market and the various factors affecting it, join us at Battery Materials 2019 in Shanghai this April. Find out more by clicking here.

* All lithium carbonate, hydroxide and spodumene prices are available in our Battery Raw Materials Market Tracker. Get a sample of the report here.