Posted on - 15 Apr 2021
You don’t have to be a battery materials specialist to know that Chinese spot lithium carbonate prices are up over 100% over the past 6 months. And lithium’s not the only key battery material that has seen price rises. In fact, all of the key battery precursor material spot prices are up since 2020.
While there’s been some correction in nickel and cobalt prices recently, mainly due to speculative activity, flake graphite and lithium prices continue their steady march upwards.
For many years, battery producers and consultants have been suggesting that lithium-ion battery prices and costs are set to fall. Many battery raw materials specialists, however, suggest that this is unlikely because they expect a battery raw material shortage to result in higher battery raw material prices.
It’s the first stage of raw material shortage that we are seeing now. But the question is – how long will it take for higher prices to filter through markets and impact the profitability of battery producers?
The answer is – longer than you might think.
And it all comes down to the structure of the industry. Most tier 1 battery producers buy their raw materials on long-term contracts. Prices are negotiated on an annual basis. For the major lithium producers such as Albemarle (NYSE:ALB) and SQM (NYSE:SQM), the bulk of their sales are on contracts. An example contract would be the one agreed between Korean battery producer LG Chem (KRX:051910) and SQM in December 2020, an 8-year deal to supply c.55Kt of lithium carbonate equivalent.
This means that those lithium producers are not set to get the benefit of higher prices until they renegotiate their contracts, probably for the calendar year 2022, maybe for the Japanese financial year 2023 (ie from April 2022-March 2023) . This phenomenon can be illustrated in the chart below. It shows China spot lithium carbonate prices, Chilean export prices and Japanese, Korean and Chinese import prices. You can see that, in the 2015-17 lithium upcycle, it took in excess of eight months after the Chinese spot price started to move (in mid-2015) for those price increases to start to be reflected in Japanese/Korean import prices.
We assume that most Japanese and Korean battery and cathode producers are buying material on contract, whereas there is a much higher spot component for Chinese battery makers.
Similarly, at the top of the cycle, spot prices started to fall some time before contract prices (as illustrated by Japanese/Korean import prices) did.
The conclusion of all this is that major battery producers likely won’t start to see cost appreciation from higher materials prices until CQ1/22. But, when they do, it could be significant. Given that lithium carbonate spot prices are up over 100% now, lithium hydroxide prices are up c.60%, and both could rise further before the end of the year, raw material suppliers may be asking for an 70-100% price increase from their customers for annual contract negotiations. Given the current shortage of material in the market, and the medium-term outlook, they might very well get it too.
We’ve seen in other cycles, and other materials, what happens when we enter a secular demand cycle with weak supply response; substantial price appreciation. There will be pressure on battery/cathode/anode producers to adopt quarterly rather than annual raw material price contracts and then potentially eventually monthly price contracts. We saw the same thing in iron ore and coal in the China supercycle event.
It will then be interesting to see who takes the pain of higher raw material prices? Will it be battery/cathode/anode producers, or will they be able to pass the higher costs onto EV makers? Time will tell, but hopefully by the beginning of next year we’ll start to see industry participants take the potential for a medium-term shortage in battery material prices seriously.
I’ve written extensively about the upside potential for battery raw materials prices in Battery Materials Review. In the August issue I predicted, based on my experience of past supply/demand imbalances, that raw materials prices could rise 4x from prevailing prices at the time over the course of this cycle. Given that spot lithium prices have risen c.60-100% and other materials prices less so far, that means that there’s considerable further potential for prices to rise. Rapid investment in new capacity will be needed to head this off. Hopefully an increase in prices will start to make this more real for auto producers and the sector will finally see that it needs to make capital available for investment in raw materials if battery economics are not to be impacted.
There are clear winners and losers in terms of lithium producers exposed to spot and contract tonnage, and the equity market seems to have sussed this out. It’s noticeable that the Australian hard rock lithium producers, which are higher cost and more leveraged to spot prices have materially outperformed the US-listed brine producers which have much lower cost curve positions and more exposure to long-term contracts. The chart below illustrates the differences in equity performance. It could be Q1/22 results before we see the US-listed brine producers posting significant increases in revenue due to higher prices…