Fitch solution: lithium prices will return to normal as demand increases

After the surge in spot prices in China from the end of December to the end of January 2020, Fitch (Fitch Solutions) National risk and Industry Research expects lithium prices to return to normal soon.

Spot prices of battery-grade lithium carbonate and lithium hydroxide in China have risen since the end of last year due to tight supply. The January rally intensified as Chinese lithium producers, such as Jiangxi Ganfeng, forecast limited supply due to increased demand downstream ahead of the Lunar New year in the first two months of this year.

Although it rose by 50% to 80% (based on lithium hydroxide or lithium carbonate) between the end of December and the end of January 2020, lithium prices remained well below the highs of 2016 and 2017 until the collapse of lithium prices in 2018 due to surplus oversupply.

For example, the price of advanced lithium carbonate in October 2018 is still about 1.5% higher than the current rising spot price.

At the same time, lithium prices are expected to benefit from the accelerated use of the electric car (EV), supporting the agency's bullish outlook for a continued rebound in prices.

Lithium is a key raw material for the necessary transition to a green economy. (CRM), is often used in the manufacture of lithium-ion battery applications in electric vehicles and in electrical equipment or nearby solar panels to store excess solar energy.

Contrary to previous exuberant expectations of sustained rapid growth in lithium demand since 2016, the global economy adopted important policy measures and environmental commitments last year, setting the tone for reliable demand growth in the future.

According to Fitch Solutions Review, our automotive team currently predicts that the global electric fleet will grow at an average annual rate of 23.6% between 2021 and 2030, with 83.6 million electric vehicles on the world's roads by 2030 and 10.3 million by 2020. As a result, as demand continues to grow, global lithium supplies are expected to decline in the next few years, putting upward pressure on prices.

In this context, Fitch Solutions said that in order to prevent supply shortages within a decade, a large amount of investment must be made in the development of lithium batteries.

According to the Barens News Agency, about 60, 000 tons of lithium carbonate equivalent (LCE), is needed to produce a million electric cars. According to the U. S. Geological Survey, the world's annual lithium production in 2019 is about 410000 tons.

Assuming that absolute lithium production does not increase and according to the annual electric vehicle sales forecast of the Fitch Solutions automobile team, the agency expects lithium supply to begin to be difficult to meet the demand of the automobile industry in the next five years, and the global electric vehicle supply may be in short supply by 2027. Sales are expected to reach 10.9 million.

Although the auto team now forecasts that electric vehicle sales will reach 14 million by 2030, Tesla CEO Elon Musk (Elon Musk) said in September 2020 that he expects industry-wide electric vehicle sales to reach 30 million by 2030.

Fitch Solutions said Mr Musk's goal was to build 1 million electric vehicles, which would require about 60, 000 tonnes of LCE, and the supply of lithium must reach 1.8 million tonnes of LCE fuel, an increase of about 439 per cent over global production in 2019.

Fitch Solutions points out that if industry demand is so high, it is expected that global lithium supply "may not be able to adapt to this growth at the current rate of project development".

The agency lamented that this posed a huge upside risk to lithium prices in the second half of the next decade, although it noted that supply concerns were "nothing new" and said countries had been strengthening initiatives aimed at strengthening their supply chains.

Financial support and investment incentives will be key for upstream producers to continue to push forward current lithium projects, which have been delayed by weakening investor sentiment after the sharp fall in lithium prices since 2018.

Most recently, on January 26th, the EU (EU) approved a subsidy of US $3.5 billion to 12 member states as part of the European Battery Innovation Project, which spans the entire battery production chain, including battery extraction.

"We expect government-led measures to help strengthen the supply of lithium, thereby alleviating some supply concerns. In addition, due to the increased supply of hard rock mining projects, we expect lithium hydroxide to exceed the use of lithium carbonate in the long term. "

Lithium carbonate will continue to be used in battery development in the short term, the agency said, pointing to the fact that the spot price of lithium carbonate in China has exceeded that of lithium hydroxide since the first price rise since April 2018.

However, lithium hydroxide is likely to grow more strongly in the coming years due to increased hard rock lithium development in Europe and Australia and advances in battery technology conducive to lithium hydroxide cathodes.

Lithium-rich spodumene extracted from hard rock ores can be first processed into lithium hydroxide, while lithium salt water common in Latin America must be processed into lithium carbonate and then converted into lithium hydroxide at an additional cost.

In addition, the increase in the supply of lithium hydroxide will also help narrow the price gap between the two forms of battery-grade lithium, Fitch Solutions said. The desire to improve the performance of lithium iron phosphate cathode materials will also support the increase in lithium hydroxide production as automakers seek to reduce the price of battery packs to less than $100 per kilowatt.

We stress that sustainability across the value chain will receive increasing attention as it may pose a threat to demand for lithium carbonate and thus lead to lower prices.

"as major economies expand their focus on sustainability upstream, water-intensive carbon-emitting lithium brine operations may be less popular than more environmentally friendly lithium hydroxide practices, such as the direct extraction of lithium from carbon neutralization, which is being developed in Germany," the agency said. "

It added that the EU was also seeking to implement a carbon boundary tax to prevent "carbon leakage", which could increase the future cost of importing lithium carbonate from Latin America.