The boom – bust – boom cycle taking place in the lithium market

Following the 2021 Fastmarkets Lithium Supply & Markets event, head of commodity market research for base metals and battery raw material, Will Adams provides his no-nonsense view on what has happened and what lies ahead for the global lithium market

The classic boom – bust – boom cycle

To set the scene, we saw prices for lithium peak in December 2017 at 175,000 yuan per tonne, then came a three-year price downward trend. This ended in the third quarter of 2020, at a price of 39,000 yuan per tonne. As of late November, the price has recovered at 205,000 yuan per tonne, which highlights a tight market.

New supply of lithium is on the way to market, and we will see a slow ramp up in output over the medium term, however this will take time to become readily available. A lot of that output will need to be qualified, so that will take time.

How did we get here?

1. There was an increase in supply between 2016-2019 from Orocobre, Mt Marion, Pilbara Minerals, Altura Mining, Alita Resources and AMG’s Mibra Mine

2. This led to oversupply, so we started to see prices fall between 2018-2020

3. With a falling market and a falling trend, people along the supply chain tend to destock; this is what we saw between 2019 and the first half of 2020

4. Demand hit by subsidy changes coming into effect in H2 of 2019

5. Just as EV demand started to recover in late 2019, we were hit by Covid-19 and that initially added to the downward movement. This carried on until we really saw producer response in October 2020.

Volatile times – the rebound

The current tight market is a result of a cycle of production cuts, prices rebounding, restocking, demand recovering through post-Covid-19 economy recovery and the delay in some restarts. As we wait to see the restarts and new capacity within the lithium market, the market is very tight.

  • Ex-works China prices up LC 305% and LH 359%
  • Cif China, Japan and Korea LC 319% and LH 222%
  • DDP Europe and the US LC 247% and LH 200%
  • Spodumene up 482%

How far can prices go?

We see this as a really hard question to answer, because they can go a lot further than you could think possible. We haven’t had a lot of history of the lithium market since it’s had this new role in the EV market.

With extreme supply tightness comes risk management opportunities. For many users of metal, there are obligations to supply products to their customers as they have reputations to keep. Sometimes, this means they have little choice but to bare the pain of a high price to remain a favoured supplier. This can mean they end up chasing prices higher.

Luckily, you can limit your risk by hedging. The recent LME and CME lithium contracts provide risk management opportunities as they grow in size.

Where lithium differs from other similar and relatively small markets such as nickel and tin, is in the fact lithium is undergoing such a big change, so we would not expect a price collapse. New supply is on the way and that will show up, to some extent, in prices.

It’s not all about supply

We’re seeing three key forces driving rapid growth in demand.

1. EV sales increase in China and Europe, and in the US from a low base/slow start

2. The combination of CO2 penalties and incentives to buy EVs

3. EVs are becoming more mainstream at a much quicker pace.

There are new projects and expansions on the horizon, but we know that these won’t all happen at the same time and won’t come on-stream smoothly. There will likely be ramp up issues and time needed for these lithium supplies to be qualified.

We’ll need about 1.2 million tonnes of lithium in 2025. This requires a lot of new projects to be funded soon, but time isn’t on our side. This is especially true when we know how long it can take for a mining project to get funded and up and running.

But this isn’t just about 2025. We have decades of strong growth ahead of us. It’s going to be an ongoing challenge for supply to keep up. We have recycling ahead of us, and that will help with creating more of a circular supply.

The challenges ahead

With high year after year compound average growth rates (CAGR), this leads to a massive challenge for the supply chain. New downstream capacity can be added in 1-2 years in terms of building new battery factories or new EV production lines. That’s not the same as upstream supply though, which can take 5-10 years.

In the short-term, there is another wave of extra lithium supply, and this should provide some relief to the current tightness as 2022 unfolds but is unlikely to swamp the market as the time it takes to ramp-up and qualify will vary. This will spread out the impact of the supply increases.

We see the market likely to return to being more balanced later next year, but we expect the supply chain will want to restock and will need higher levels of working stock, all of which will boost apparent demand. While prices still have further to run on the upside in the medium term, there is likely to be a lot less volatility next year as tightness fades.

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