Lithium producer share prices still under pressure but supply-chain consolidation could trigger change

Lithium producers’ share prices have generally been under pressure since late 2017, with share prices of the companies in the chart below on average trading at 15% of their 52-week high/low range. We see this as a reflection of the supply response that started in 2018. The increases came from the start-up of new supply mainly from hard rock producers in Australia but also because existing producers planned to increase output. This deflated sentiment; share prices fell accordingly.

While the supply side is weighing on sentiment, the demand side of the equation remains extremely bullish – and increasingly so. While most analysts forecast compound average growth rates (CAGR) of 25-28% for electric vehicles (EVs), Fastmarkets is looking for a CAGR of 35% (see chart). Even this number may be too conservative considering plug-in EV sales in 2018 climbed around 60% in China, were up 35% in Europe and climbed 80% in the United States, giving an average increase of around 58%. Not only did this exceed the consensus forecast but growth of 58% precedes EVs becoming mainstream.

As well, demand for energy storage systems (ESS) is expected to grow at an equal if not faster pace than EVs, albeit off a lower base. Since more electricity is required and while power generators strive to cut carbon dioxide emissions, more power will be generated from renewable sources; the variable nature of wind and solar power also necessitates more grid storage. Fastmarkets’ forecast is for grid storage to reach 24 GWh by 2020, rising to 322 GWh by 2025. Bloomberg NEF sees capacity rising to 1,000 GWH by 2040 from 50 GWH in 2020 – so while there is a difference in the numbers, rapid growth is common to both forecasts.

Temporary supply surplus but a deficit looms
Lithium producers’ share prices are generally depressed, which, combined low lithium product prices, may well mean junior miners will struggle to secure funding to initiate their projects. While there is an oversupply of lithium now, at least at the raw material stage, the rapid growth in demand from EVs and ESS means that demand will soon grow to absorb the current surplus. Subsequently, producers may well struggle to keep up with the pace of demand growth. It is very hard for mining to grow at a sustained high pace year after year, which is what it will need to do if the electrification era lasts for decades as expected.

This is especially the case given that it can take 7-10 years to bring greenfield projects on steam. The tightening of global environmental regulations and growing shortages of water will only extend this lead-in time. And if low prices and a depressed lithium equity sector deter further investment over the next few years, the likelihood of insufficient capacity in the years ahead will grow.

To make matters more critical, oversupply and depressed market conditions are emerging before EVs and ESS have become mainstream so low prices may well restrict further investment in new projects just at a time when the industry needs to invest more to ensure there is enough supply when EVs and ESS become mainstream, which Fastmarkets expects to start to happen in 2022/23.

These issues lead us to expect further consolidation along the lithium supply chain. OEMs are investing billions of dollars in their EV future so they are unlikely to run the risk of not having enough battery raw materials to meet future demand. With the new EV era expected to take root rapidly and because growth in lithium supply must run ahead of the growth in EV production because lithium products must be qualified by end users, we expect more OEMs will invest in upstream capacity.

New mines might traditionally have relied on investment from existing operators, investors and the financial sector but the downturn in the lithium market, combined with the fact that many of the mining giants – BHP, Anglo American and Glencore (Rio Tinto has the Jadar project) – are not substantially involved in lithium, may mean the massive multinational OEMs decide to step in to finance new projects, either through offtake agreements, joint ventures or direct ownership.

Such a development would probably boost sentiment in the lithium sector, bringing forward a recovery.