Chronic Overcapacity Keeps Lithium Prices in Downturn, with No Hope for Stabilization until Q4

This year, domestic and overseas lithium carbonate resource projects have been launched one after another, and smelting capacity has rapidly increased. However, the growth in demand has fallen short of expectations, exacerbating the oversupply in the lithium carbonate market and leading to a continuous accumulation of inventory. As cost reductions in the mining sector and technological transformations in the smelting sector accelerate, the cost support logic collapses, causing lithium carbonate futures prices to fall rapidly.

Lithium Ore Supply Grows in the Short Term, but may Decline in the Medium and Long-Term

From the perspective of overseas mines, Australian mines have not shown signs of production cuts amid the continuous decline in ore prices this year, maintaining stable production overall. This is mainly because Pilgangoora, Mt Marion, and Wodgina have completed cost reductions, maintaining a certain profit margin under the current ore prices. For subsequent production, based on the cost lines disclosed by major Australian mines, the current ore prices have not yet touched the cost range, making it difficult for large-scale production cuts or shutdowns to occur in the short term. Only the Cattlin mine has halted production, causing a slight reduction in output. There is still downside room for ore prices, and production cuts or shutdowns for Australian mines may mostly occur around Q4.

African and Brazilian mines may have cost advantages compared to Australian mines or belong to integrated enterprises, making production cuts or shutdowns less likely. In the medium and long term, they may maintain their expansion pace. From the perspective of African mines, Goulamina and Bougouni mines have recently commenced production, with a total lithium spodumene concentrate capacity of approximately 620,000 mt/year, contributing to most of the ore supply increment this year. Subsequently, the Kamativi mine in Africa plans to expand its production capacity by 150,000 mt, and the Zulu mine is expected to commence production shortly, indicating significant potential for increased production from African mines. Brazilian mines have maintained stable production since the beginning of the year, and the subsequent 150,000 mt capacity of the Neves project and Sigma Lithium's planned expansion completion in Q4 may contribute to growth of lithium concentrates supply from Brazilian mines.

In terms of Chinese mines, this year, the Lijiagou and Dahongliutan lithium spodumene mines have commenced production, with a total lithium concentrate capacity of 665,000 mt at a 6% grade. In addition, the Jianxiawo lepidolite mine has resumed production, and some lepidolite mines have been developed as integrated mining and smelting projects. Since the beginning of the year, domestic mines have achieved production growth of over 30%, and it is expected that domestic mines will maintain production increase in H2.

Considering factors such as supply and operating costs, in the medium and long term, the dominant factor in ore supply depends on the production pace of Australian mines. Due to the stable production of Australian mines in the short term, ore supply may maintain an increasing trend. However, in the medium and long term, as production cuts or shutdowns in Australian mines materialize, ore supply may contract.

Lithium Carbonate Production Follows Ore Supply Changes

Since the beginning of the year, due to the continuous decline in lithium carbonate prices, lithium chemical plants have mainly focused on cost reduction and efficiency improvement. In terms of ore-based lithium extraction, resource expansion and accelerated capacity improvements after technological transformations at lithium chemical plants have led to over 70% YoY growth in spodumene-based lithium extraction production. However, due to the relatively low grade of lepidolite ore, the YoY growth in lepidolite-based lithium extraction production is only around 20%. The cost advantages and slower production ramp-up have resulted in only 20% YoY growth in salt lake-based lithium extraction production. The recycling sector has seen massive production cuts or shutdowns due to losses, with limited YoY growth.

For subsequent lithium carbonate production, the dominant factor for spodumene-based lithium extraction is the raw material supply issue. As the main resource reduction in H2 lies in Australian lithium spodumene mines, spodumene-based lithium extraction faces a high risk of production cuts. Due to the certain linkage between the prices of lepidolite ore and lithium spodumene ore, the production pace of lepidolite-based lithium extraction is the same as that of spodumene-based lithium extraction. From the perspective of salt lake-based lithium extraction, the first phase of the Lakkor Tso salt lake in China with a 20,000 mt lithium carbonate capacity has commenced production, and the low-cost advantages support the continued expansion of salt lake-based lithium extraction. As power batteries have not yet entered a concentrated retirement period, the supply of raw materials for lithium recycling is limited. Although imported black mass may provide some room for increased production in the recycling sector, considering the production volume, its impact on lithium carbonate supply is limited.

In terms of imports, as some Chilean salt lakes export in the form of lithium sulfate, domestic lithium chemical imports have only increased by approximately 15% YoY since the beginning of the year. Subsequently, the expansion space for Chilean salt lakes is relatively limited, while the ramp-up of the Centenario-Ratones and Mariana projects in Argentina will bring some increments. There is also a possibility of the Res Quebradas project commencing production in the near future. In the medium and long term, lithium carbonate imports may maintain a 20% YoY growth rate.

Combining the above factors, in the short term, there is still some room for lithium carbonate supply to grow. However, in the medium and long term, with mine production cuts, lithium carbonate supply may narrow.

Short-Term Demand Is Weak, but Medium and Long-Term Demand Remains Resilient

Domestically, the demand in the EV sector has performed well overall, driven by "trade-in" policies and automakers' low-price sales promotions, achieving over 30% YoY growth. Despite the impact of the cancellation of "mandatory energy storage allocation" on the ESS sector, the rigid demand for ESS from green electricity has driven the development of standalone ESS projects, allowing ESS demand to show certain resilience.

Looking ahead, as funds for "trade-in" policies are gradually disbursed and subsidies for automobiles in rural areas are launched, there is still policy-driven demand. However, the penetration rate of NEVs has already reached a high level this year and may face growth bottlenecks. The end-use demand for ESS maintains certain resilience due to the growth of shared power stations and user-side projects.

In overseas EV sector, this year, the demand for NEVs in the EU has accelerated, providing strong support for China's exports. However, it still falls short of the expectations of emission reduction policies, mainly due to insufficient supporting facilities and the slow launch of low-end car models. In addition, Southeast Asia has seen increased demand for low-price NEVs from China. Overall, medium and long-term export demand maintains the growth rate of this year.

In overseas ESS sector, the overall growth rate of the EU ESS sector is relatively stable, with the main demand changes coming from the installation rush in the US ESS sector.

Combining the above factors, in the short term, there is a possibility of slowed growth in demand, which may accelerate the decline in lithium prices. However, demand in Q4 may provide some support for lithium prices.

Currently, lithium prices have not fully compressed profit levels within the industry. The short-term weakness in demand will worsen the oversupply in the lithium chemical market, accelerate the decline in lithium prices, further weigh on ore prices, and force the clearance of lithium resource capacity. Meanwhile, as demand recovers in Q4, it is expected that lithium prices will stop falling and stabilize.

The author of this Chinese article is Guoyuan Futures.

Please note that this news is sourced from https://www.cnmn.com.cn/ShowNews1.aspx?id=463693 and translated by SMM.