Evolution in China’s lithium supply chain paves way for commoditization

Lithium has traditionally been considered a specialty chemical, but it has been acting more like a commodity in recent years, according to analysts - a development sparked by the growth of the Chinese industry and increased quality expectations.

Increasing production of lithium chemicals from diverse sources, higher quality requirements in China as well as frequent and sudden adjustments in global supply and demand have led to price volatility. These developments have also made lithium a much more fungible material.

China emerges as dominant supplier
China today accounts for over 65% of global battery production and over half of the world’s total lithium chemical production.

Growth in Chinese lithium compound production and the rising number of companies able to supply good quality lithium both domestically and overseas have been a major factor in transforming lithium into a commodity as well as a specialty chemical product.

Fastmarkets analysts expect supply to rise to as high as 355,000 tonnes of lithium carbonate equivalent (LCE) in 2019 on rising Chinese production, outstripping demand of 300,000 tonnes. But low prices will force producers to apply supply restraint, thereby reducing the amount of material reaching the physical market.

The most commonly produced lithium-ion batteries in China are lithium iron phosphate (LFP), lithium manganese oxide (LMO), lithium nickel-cobalt-manganese (Li-NCM) and lithium cobalt oxide (LCO). These can typically be produced using different grades of lithium carbonate and hydroxide.

LCO batteries are widely used in electronic consumer products, Li-NCM are mostly applied to pure electric vehicles (EVs), while LMO and LFP batteries are used in plug-in hybrid EVs (PHEV) and E-buses. Along with increased adoption of pure EVs and consumer pressure for vehicles with longer driving ranges, global battery makers are looking to increase their market share in high-end battery chemistries, such as NCM 622 and 811—these battery chemistries require higher quality lithium carbonate and hydroxide.

Analysts believe battery makers will have increasingly stringent requirements when it comes to the type of lithium compounds used as raw materials. This, they suggest, will push lithium producers in China to keep increasing the quality of the material produced.

“Lithium is becoming more commoditized as the quality of lithium material produced in China increases to meet domestic and international requirements,” William Adams, head of battery raw materials research at Fastmarkets, said.

“While competition rises with more producers able to produce battery grade material, prices will fall. To take advantage of weaker prices, consumers will qualify more suppliers and in turn that will further commoditize the products – we have already seen this start to unfold over the past year. Chinese producers also have increased exports to global battery and EV makers since last year,” Adams added.

Adding to the growing production of good quality lithium compounds in China, physical proximity between producers and consumers in the country has also allowed for shorter delivery terms – of five to 30 days – contributing to the booming Chinese spot market, in comparison to the typical mid- to long-term contracts in the rest of the world, which has historically been supplied by South American countries.

Increasing the speed at which lithium units can be exchanged both within China and between neighboring countries has contributed greatly to the commoditization of the lithium market.

Chinese output to keep supplying battery industry
For most of 2019, surging supply of lithium chemicals from China has led to more competitive prices for consumers in Japan and South Korea. This has increased exports between China and these two countries.

Lithium prices have fallen for most of 2019 in China. The lithium carbonate, 99.5% Li2CO3 min, battery grade, spot price exw domestic China has fallen by 40.3% year on year to 56,000-61,000 yuan ($7,829- 8,528) per tonne on October 10 from 72,000-80,000 yuan on October 11, 2018.

Hydroxide monohydrate prices have been on a similar downtrend. Fastmarkets’ assessment for lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, exw China has plunged by 44.3% over the same comparison to 60,000-68,000 yuan per tonne from 110,000-120,000 yuan per tonne.

At the same time that the Japanese and South Korean cathode and battery makers procured more material from China, they have locked in contracts at fixed prices on a shorter-term basis of up to three months to one year as a way of managing the risk of falling prices.

“Over the course of past years, Chinese producers have managed to produce good quality battery grade lithium carbonate and hydroxide and have worked on building trust regarding the quality of their material,” Daniel Jimenez, partner at mining consultancy iLimarkets, told Fastmarkets.

“So, on the one hand we saw that some of the legacy lithium producers had limited capacity to supply the Japanese and South Korean markets over the past year, while on the other hand, good quality material alongside the lower prices offered from China have triggered an increase in Chinese exports to Japan and South Korea,” Jimenez added.

Growing production of lithium compounds from within China, headed by the likes of Tianqi Lithium, Ganfeng Lithium, General Lithium and Yahua Lithium, will likely keep increasing the pool of lithium producers in the global market as well, analysts say.

“There are two things that make it more of a commodity. One: more good quality supply and cheaper prices mean users may qualify more sources [thereby playing one supplier off another]. And two: more expertise at the processing stage means the ability to vary the grade to suit the customer,” Adams said.

So, while lithium will remain a specialty chemical, many believe that as more processors get to know how to refine impurities it will become more like a commodity.