Large lithium presence at LME Week speaks volumes about market

London Metal Exchange Week is traditionally focused on the base metals but at this year’s event, which took place last week, there was a definite focus on battery raw materials - and especially lithium.

Notably, many of the events and receptions included talk about battery raw materials and a lot more ‘lithium people’ were in town.

When markets are suffering, the turnout at occasions such as LME Week are often low, which makes it all the more interesting that there was a noticeable presence in lithium this year. This suggests that the fledgling but rapidly emerging market came to London to see what others really thought.

Given that there is so much hype and chatter about lithium – stakeholders push ‘their’ lithium project as the ‘best in class’ or ‘world-class’ or the “biggest lithium deposit in the world” or the “world’s largest undeveloped hard rock project” – perhaps they attended to meet the lithium supply chain to hear things first hand.

This gave the market the opportunity for a reality check; our takeaways are:

  1. While a lot more lithium is going to be needed in the years and decades ahead, too much new production came on stream in 2018/2019.
  2. Too many in the market did not give the Chinese enough credit for being able to produce enough lithium product of acceptable quality from spodumene. (The Chinese are very adept at finding solutions – the fact they have managed to produce quality lithium that overseas battery manufacturers can use has resulted in the market become flooded).
  3. Stockpiles of spodumene and processed lithium have built up, forcing many to lower their offers to shift material for cash-flow and storage reasons. Processors have attempted to push their falling margins to spodumene producers – demanding that their cut their prices or risk losing sales – so spodumene prices have been falling too.
  4. The fallout from the trade war and significant subsidy changes for Chinese EVs have hit demand harder than the market expected.

Some lithium producers still need to ramp-up to nameplate capacity to lower costs of production so as to remain competitive; others have built up too much stock because their offtake partners have not taken what they committed to, prompting them to cut output; others have had to halt production because their cash-burn has been too fast.

Numerous announcements from large and small producers about putting expansion plans on hold suggest insiders expect the market to remain oversupplied for an extended period.

The reality check has resulted in a producer response, in other words.

Sowing the seeds for the next boom
Low lithium prices, low lithium equity prices and limited bank and investor interest in financing this still ‘small’ market are sowing the seeds for the next boom.

While this depressed market climate is encouraging some M&A activity, which seems to be focused on buying cash-strapped existing producers or next-in-line projects.

Projects further way from being in production, or still in exploration phase, are struggling to raise the required finance.

The danger is that the market now stays depressed while stocks are run down, some expansions continue and idle production is eager to restart. If this continues to starve those projects waiting for final investment decisions, the rise increase of not enough investment made soon enough to ensure adequate supply when demand starts to soar.

Electric vehicles (EV) and energy storage systems (ESS) are not forecast to become mainstream until 2024/25 – there seems a high risk that this could be the time when the next shortage emerges.

Unsurprisingly, with the double-whammy of oversupply and reduced demand hitting the lithium market, EV sales in China fell year on year in July, August and September while spot lithium prices have continued to fall.

The key lithium price series that Fastmarkets assesses are spot prices for battery grade lithium carbonate and hydroxide on an ex-works (exw) China and cif China, Japan and Korea (cif CJK) basis. These have been trending lower.

But what is more striking is that prices started to accelerate lower in September – Fastmarkets’ price assessment of carbonate cif CJK fell 9.1% on September 19.

In hindsight this no doubt reflected the pain that China’s EV industry was suffering. EV sales fell 34% in September year on year after falls of 16% in August and 4.7% in July. Users of pricing methodologies that reference trade data or monthly assessments would not have seen this price development for weeks, during which time they still could be booking spot business at an out-of-date price.

Fastmarkets’ price assessment has in recent years shown that China’s exw spot market has set the direction for lithium prices, with spot cif CJK following and the duty unpaid European and US price following therefore, and then by contract prices and the fob prices that SQM and Orocobre publish (much to their credit).

A benchmark for a fast-moving market?
Fastmarkets is consulting with the lithium supply chain to produce a lithium benchmark that will reflect market developments in a timely manner. Markets tend to react fast to developments and then consolidate while the supply chain adjusts to those developments and to the new price levels.

Markets that are priced on methodologies that rely on trade data that lags behind the spot market or are not priced regularly enough run the risk of not reflecting the situation.

While weekly or daily prices will by their very nature be more volatile, these prices can be smoothed by taking the average over a month or quarter; a more-frequent price assessment reflect the latest price that will have taken into account the most recent market developments.

Fastmarkets is offering the lithium industry an opportunity to operate more efficiently and smoothly. If you produce or use lithium your expertise is handling the lithium, do you want to tie resources negotiating all aspects of the price?

Given lithium’s specialty chemical status, lithium from different sources may warrant a premium or discount but, once these are agreed between seller and buyer, the differential should not change that often. How much easier would it be to enter contracts basis an unknown benchmark price +/- a differential for the specific product?

And with more in the supply chain taking part in pricing, the price will be more reflective of the global/regional situation. This is an opportunity for the lithium industry to work with Fastmarkets to reduce the company-level risk associated with buying and selling lithium products basis lithium prices that may be assessed in different ways.

The lithium supply chain will struggle to keep up with the rapid compound average growth rate before the challenges it poses bear down on the industry, making may a good time to at least ensure the supply chain works efficiently and can transfer lithium along the chain basis a benchmark price.

A Fastmarkets benchmark price adopted by the LME will also provide liquidity to the price and risk management to those in the industry that want to hedge.