Lithium chemical spot prices have been in freefall since December and there are many commentators in the market talking about death spirals and about how lithium chemical prices won’t stop falling until they reach the US$10-15/kg level.

I believe they’re wrong.

In fact, I believe that lithium chemical prices will stabilise in the near-term and then will bounce rapidly upwards.

Why do I believe that? Three reasons.

1. The marginal cost of production

I discussed my thoughts on the marginal cost of production in detail in BMR’s 2022 Yearbook (which you can download for free on batterymaterialsreview.com, by the way) and in the February issue of Battery Materials Review, so I won’t labour the point here.

But, in my view, the marginal cost of production, with current SpodCon prices, is closer to US$40/kg for lithium chemicals than US$15/kg and, given that Chinese spot prices for battery grade lithium carbonate are now down to just below US$40/kg, we are around that level.

Generally, prices of a material will bounce off the marginal cost of production (65th percentile of the cost curve) in a down market and we’re now within touching distance of that on China spot prices, although Asian prices are much higher. The mechanics of that in this cycle will be that the Chinese merchant lithium converters which rely on spodumene feedstocks will start to close down because they won’t be economic.

Currently the lithium carbonate conversion margin is close to multi-year lows and we do not expect that to improve substantially, even when SpodCon contract prices roll over for Q2/23.

This will cause shutdowns of LC converting capacity and even greater conversion of carbonate material to more highly-priced hydroxide, which will, in turn, cause carbonate prices to stabilise. Then re-stocking will kick in…

2. Re-stocking is likely

There’s no getting away from the fact that the magnitude of the drop in EV sales and cell manufacturing activity in December and January was substantial. In the March edition of Battery Materials Review we discussed the magnitude of the fall in cell production in China from 63.4GWh in November to 28.2GWh in January…that’s a big drop, and the impact of that has cascaded along the supply chain.

That drop came about because of normal seasonality in the Chinese market (as can be seen from this chart, one of the ones we publish monthly in Battery Materials Review); concern over the removal of EV subsidies; Covid-related shutdowns and an extended Lunar New Year holiday.

All of those factors are now abating:

● Covid-related shutdowns have abated and workers have returned from the Lunar New Year holiday;

● While the rate of growth of EV sales has slowed in Jan-Feb, it’s still up c.20% y/y in the first two months and anecdotally in March, suggesting activity is recovering; and

● Sales should broadly increase in m/m terms throughout the rest of the year.

That means that demand for cells will recover and cell manufacturing operating rates will increase, which will lead to stronger demand for cathode materials and hence lithium. It could take a while (weeks, months) before the re-acceleration in activity filters all the way down the supply chain to lithium though.

3. Low inventories

A number of commentators are out in the market flagging high lithium carbonate inventories. They talk about lithium carbonate inventories at smelters and downstream more than trebling over the past three months. And indeed, carbonate inventories have risen in absolute terms.

But they don’t look so elevated in days of consumption terms. And, in a market where demand has nearly quadrupled between 2019 and 2022, that’s the measure you’ve got to use because inventories in absolute terms don’t tell the whole story…

In days of consumption terms, inventories are currently at about 50-54 days of consumption, depending on whose series you use. But if you correct for what demand was in Q4/22 rather than the level it’s been over the past few months, then they’re much lower…at about 35-38 days of consumption…only about one month of supply. And that’s not a lot.

Especially when you consider how low lithium hydroxide inventories are…they’re at less than one week of supply, by our calculations.

And yes, I’m not going to deny that cathode inventories are also at elevated levels. But they’re already being digested and, in a few weeks’ or maybe a month’s time, when restocking is well underway and inventories are at more manageable levels, lithium prices will bounce, in my view. And then, I believe, they could squeeze very tightly indeed.

Another thing…What is a supercycle?

One more thing just to mention, which I think confuses the market. What do we mean when we talk about a supercycle?
I think a lot of people think a supercycle means that prices rise over a long period of time.

But that’s not what most analysts mean by a supercycle.

In a supercycle, prices remain at elevated levels over a long period of time. They’re not always rising. Sometimes they’re falling. They’re cyclical. As is demand.

Look at the chart I’ve plotted below that shows copper prices during the 2002-12 China Fixed Asset-driven industrial metal supercycle. You can see that copper prices ran up fast and then came off, then they ran up a few more times and then sold off a few more times. But on average they were about US$7000/t (US$3.20/lb) over an extended period. Compared to the US$¢80-90/lb they were at before the supercycle that’s an elevated level, but they weren’t always at US$4/lb over the course of the supercycle.

I’ve plotted the situation in lithium carbonate prices on the same chart. I’m not necessarily expecting prices to squeeze up ultra-high. But I think they will remain at elevated levels (ie +US$60/kg) over a long period. That’s what I’m talking about when I say that lithium prices are in a supercycle.

For those who are interested in lithium, I note that the Feature article in March 2023’s Battery Materials Review was on the exciting emerging hard rock province in Quebec and, for those who want to learn more about hard rock, I’d recommend How to Invest in Hard Rock Lithium, which is available from our website for £20 (+VAT for UK entities).

Matt Fernley is Head of Research for Westbeck Capital’s Volta Energy Transition Fund and Managing Director of Battery Materials Review.