Lithium promises to be a wild ride for the next decade
wild ride

Lithium promises to be a wild ride for the next decade

At the time of writing, Chinese lithium carbonate prices have fallen nearly 50% since late last year.  Nevertheless, the new prices are still extremely high compared to the longer history.  Payback periods on new capacity remain in the months, not years.  What is going on, and what happens next? 

What is going on is that EV demand has softened a little in recent months, and the supply chain is backing up a bit.  EV producers, especially in China, are now discounting in order to move the vehicles. 

One issue impacting EV demand is the end of most incentives in China, after several years of strong government support.  The historical pattern is that the expectation that incentives will soon end pulls forward demand from future periods.  A priori, we might expect a softer 2023 in China (which accounted for over 60% of global EV sales in 2022). 

Another issue that is impacting 2013 expectations is the concern over the economic outlook for major western economies, in the aftermath of substantial monetary tightening in 2022.  Perhaps we should expect softer demand outside of China too. 

What happens next?  First some context.  2022 saw solid EV demand growth, up 55% on the prior year.  That is about the average of the past decade.  With EV’s now accounting for a little over half of lithium consumption, that level of EV growth translates into roughly 30% lithium demand growth. 

Auto companies are headlong building new EV models and capacity, and consumers seem keen to make the switch.  So, perhaps 30% lithium demand growth is a decent assumption for the coming years, cycles aside. 

That’s a big assumption and easy to get wrong.  Also easy to get wrong is the supply growth.  Lithium mines, especially in the hands of junior companies who might have to overpromise a bit, have tended to disappoint against their commissioning and expansion targets.  Nevertheless, new projects are constantly being added to the pipeline, so every time someone adds up the expected supply growth, the totals are higher.  That trend seems likely to continue, which means that even though we might expect future projects to disappoint the same as the older ones, it is still quite plausible that supply can grow at a trend 30% growth rate to match demand. 

That’s an interesting set-up.  If both supply and demand look like growing at 30%pa (remembering that most mining commodity markets grow at 0-4%pa) then the chances of a significant mismatch, say 10%, in any one year is quite high.  And a 10% mismatch in a commodity market is huge.  The price action says that 2022 might have seen 10% under-supply.  If at some point we see a 10% over-supply, either because of lumpy supply growth or because of a weak demand year, then almost certainly the lithium price will be inside the cost curve, as it was just a few years ago. 

Lithium promises to be a wild ride for the next decade and perhaps longer.  Your correspondent was at a major global mining investment conference recently, which featured over thirty lithium producers and developers and was attended by some 20 auto firms keen to get to know those companies.  That felt like a peak.