[SMM Analysis] Analysis and Prospect of Lithium Salt Market in the painful period of New Energy Transformation

SMM6 27 June: June 26, Beijing announced the abolition of pure electric vehicles municipal financial subsidies, at the same time means that the 3-month subsidy retreat transition period is over. For the entire new energy industry chain, even if it is ready for "winter is coming", it is inevitable that it will be caught off guard. In this regard, we have conducted research and summary, the analysis is as follows:

Back in January and May 2019, lithium carbonate prices in China remained relatively stable, and for industrial grade lithium carbonate, there was a small rebound in April. A detailed analysis of this can be seen-"[SMM analysis] but not waiting for day-to-day exposure-the detailed explanation and prospect of the recent rise in lithium carbonate prices." And the market did, as we had predicted, had a clear bearish mood in the middle and late June and a fall in lithium prices driven by falling demand.

For the price decline that occurred in June, we believe that the key reason is the rapid decline in demand caused by the "transition of production structure of downstream enterprises after the end of the transition period of subsidy retreat", which in turn shows a situation of "oversupply". Corresponding to the market phenomenon, it is reflected in the sharp decline in the demand for battery-grade lithium carbonate and lithium hydroxide, while the demand for industrial lithium carbonate weakens more gently.

From the point of view of demand, the main applications of battery grade lithium carbonate in positive electrode are ternary materials (3 series, 5 series and part 6 series), dynamic lithium iron phosphate and lithium cobalt acid, while battery grade lithium hydroxide is used in high nickel ternary cathode materials. At the end of the subsidy retrogression transition period, in order to obtain more subsidies and cater to the global trend of high nickel, downstream battery enterprises and cathode material enterprises have begun to adjust the production line structure.

Before that, most of the ternary cathode materials enterprises in China produced NCM523 and NCM622. Now the manufacturer of ternary cathode materials in order to meet the changes in the demand of the battery factory, its production line will be adjusted. Technical adjustments are not overnight and are bound to take months. And the transition adjustment of the production line coincides with the middle of the year, for large listed material production enterprises, on the one hand, for the consideration of semi-annual report data, to avoid excessive inventory accumulation, "would rather reduce production than accumulate." In addition, the subsidy retreat makes the whole industrial chain tight, excessive inventory will also occupy cash flow and then affect the operation of the enterprise. As a result, the reason for the weakening of demand for battery-grade lithium carbonate and battery-grade lithium hydroxide is self-evident.

On the other hand, battery-grade lithium carbonate "city gate fire", but also "affected" the industrial grade lithium carbonate. As we mentioned earlier, the industrial lithium carbonate is partially converted to battery-grade lithium carbonate and consumed, this time the demand for battery-grade lithium carbonate has been sharply reduced, and the natural corresponding purification demand has been reduced. In addition, summer is the traditional off-season for digital 3C products, and the demand for lithium manganate cathode materials used in this area is beginning to weaken. However, the demand for small power lithium manganate used in low-speed electric vehicles such as electric bicycles is better, which can boost the demand for industrial grade lithium carbonate. Therefore, the weakening of demand for industrial grade lithium carbonate is more moderate.

From the point of view of supply, in the process of communicating with lithium salt production enterprises at the end of the month, we found that some lithium salt enterprises have reduced production in order to avoid accumulation, including a large lithium salt production plant in Jiangxi Province. We initially predict that the national lithium carbonate production will be reduced by 10% and lithium hydroxide production by 30% in June compared with the previous month.

It can be seen that smelting production enterprises in the face of changes in demand, the response is very timely, the adjustment is also very flexible. Therefore, for lithium salt enterprises, although it will inevitably passive accumulation, but will adjust production according to the market, in order to avoid too much lithium salt inventory and price fall too fast, to protect the cash flow of enterprises.

But in the long run, production cuts mean an increase in unit costs (especially for new companies) and the possibility of loss of market share, which is not a long-term solution. Taken together, we believe that the price competition in the lithium salt industry in the third quarter of 2019 is still inevitable.

According to feedback from people in the industry, the current downturn in demand is likely to last for three to four months. For the downstream customers more stable and high-quality large lithium salt enterprises, the time to feel the recovery will be earlier than the customer structure of small and medium-sized enterprises.

Revolution is bound to bring war, just as the birth of a new life must be accompanied by pain. But after a thousand sails are over, you can finally meet Wan Muchun.

SMM Cobalt Lithium Research team

Hong Lu 021 51666814

Ning Ziwei 021 51666780

Qin Jingjing 021 51666828