Albemarle Corp., the world’s largest lithium producer, is not impressed by the London Metal Exchange’s (LME) plans to launch a lithium contract.
“An exchange contract tends to support a commodity market, and that’s not what we believe this (lithium market) is,” David Ryan, the company’s head of corporate strategy and investor relations, told an industry conference in Chile earlier this month.
The conference was hosted by Fastmarkets, which has been chosen by the LME to provide the reference price for the new contract, but Albemarle won’t be contributing, for now at least.
It and other established producers believe that lithium is a specialty chemicals market and should be priced on a contract-by-contract basis.
At a chemical composition level that may well be right, but in terms of pricing, lithium is conforming perfectly to the boom-and-bust pattern of a classic commodity market. The challenge for the lithium industry is how to live with such volatility.
FROM BOOM TO BUST
The lithium market has lost much of its previous heat over the last year or so.
Chinese spot lithium carbonate prices, as assessed by Fastmarkets, have collapsed from a peak of $26.23 per kilogram in November 2017 to $10.93 last month.
Producers such as Albemarle don’t even like the concept of a spot Chinese price, arguing it is not representative of the bigger volumes changing hands under longer-term contracts.
However, term contract prices have also been sliding. Those for delivery to China, Japan and Korea are currently assessed at $11.75 per kg, down from $18.50 per kg in the first half of 2018.
Indeed, the way pricing has evolved over recent months suggests that the spot price has led contract pricing, undermining the contention that the Chinese market is a chaotic side-show.
Moreover, the convergence of spot and contract pricing suggests, to quote Fastmarkets analyst Will Adams, that “lithium is finding the commodity aspects within its inherent chemical nature.”
SUPPLY AND DEMAND
Lithium has gone from boom to bust on good old-fashioned commodity fundamentals.
While underlying demand from the electric vehicle (EV) battery sector remains robust, Beijing’s rejig of its EV subsidy scheme has injected a lot of short-term unpredictability.
Battery makers have been scrambling to adjust battery chemistries to meet the higher thresholds for subsidies, while a flagged end to all subsidies after 2020 threatens a period of consolidation in a crowded Chinese battery sector.
Supply, meanwhile, has been surging in response to the 2016-2017 price spike.
Fastmarkets estimates the global lithium market has transitioned from supply shortfall to surplus.
Its base case forecast is for the surplus to grow from 28,000 tonnes last year to 68,000 tonnes this year and 146,000 tonnes next year.
It’s therefore no surprise that producers are putting the brakes on their growth plans.
Chile’s SQM, for example, has pushed back an expansion of its domestic brine capacity until the end of 2021. It is also seemingly stockpiling material in the short term with projected sales of 45,000-50,000 tonnes this year falling below anticipated production of 60,000 tonnes.
Toyota Tsusho Corp, which produces about 15,000 tonnes of lithium carbonate at its plant in Argentina through a joint venture with Australian miner Orocobre, said on Friday it would study the market for at least two more years before deciding whether to further expand supply.
Producers were caught out by the original price boom. The lithium market appears to have wrong-footed them again, this time on the downside.
AND BOOM AGAIN?
Expect more price turbulence ahead.
The current period of weaker prices is almost certainly storing up trouble for future supply.
The electrification revolution is still only in its infancy. Even in China, which accounts for one in every two new EVs sold globally, new EV passenger sales last year accounted for under 5% of total sales.
However, the ratio is rising all the time, while automotive companies in the rest of the world are articulating ever more ambitious plans to switch from conventional to electric vehicles.
Demand for batteries is going to experience exponential growth over the coming years, which means that demand for lithium is going to follow suit.
The danger is that supply isn’t going to be there to meet it, just as happened in the original boom.
Low lithium prices are translating into low equity prices for junior mining companies, making it difficult for them to raise sufficient financing to bring new capacity to the market.
Established producers, meanwhile, may have latent expansion potential but bringing new capacity on stream cannot be done at the flick of a switch.
FUTURE VISIBILITY
The lithium market is still in transition from niche chemical product to something much bigger.
It’s no surprise that progress is erratic, given a long list of unknowns as to how fast the EV sector will grow.
Demand uncertainty is in turn generating supply uncertainty.
The current nature of lithium market pricing is actively exacerbating the problem as producers react to first the boom and now the bust in prices.
What both producers and consumers really need is a forward price curve. Not only would it inject some much-needed transparency into the market but it would allow for forward hedging, a key facilitator of bank financing in the minerals sector.
Without some external reference point for future prices, junior producers are going to struggle to persuade financiers to invest in future production.
This is of course what the LME is proposing to provide, although there is still no hard launch date for the new contract.
Established players such as Albemarle may not like the commoditization of their product, but lithium is already starting to show all the behavioral characteristics of any other commodity market.
As other metal markets such as copper have found out, cyclicality, extreme at times, is the norm. But at least copper producers and consumers have the option of hedging against the resulting booms and busts. Lithium players currently don’t have that luxury.