Thanks to $ man on CXO thread
A shared article,
This Linkedin article on Rodney Hooper's tweet is worth a read!
Closing paragraph:
"
Based on all the above it seems
the lithium chemical supply chain is in crisis mode. Unless new projects are financed and existing projects
that are financed but not built are
expedited
more quickly
there is going to be a substantial shortfall in supply. There is no substitute for quality
and that will limit growth and project selection even further. It would appear
there is no brine versus hard rock debate, both are needed, urgently.
Has the lithium chemical SUPPLY chain entered crisis mode?
Published on February 28, 2019
Throughout the past year lithium demand forecasts have continued to increase. Not marginally, but rather in huge leaps. On balance the average lithium demand forecast (measured in LCE), has increased by 50%. Numerous recognized forecasters have now
publicly
disclosed their numbers.
In January I published the following demand estimates to 2025 based on a 21% p.a. growth rate. This isn't an exact forecast as my expectation is for more elevated growth rates post 2021/2022 when battery prices test the $100/kWh mark and demand accelerates.
Most recently
Albemarle
included the following slide in its annual financial results. Their 2025 forecast now matches mine, further, they have an upside growth bias that suggests 1,300K MT is possible. Their forecast also suggests a step change in growth rates in 2023.
We find ourselves in a situation where OEM's and other downstream customers believe the misguided narrative from certain banks that there will be ample lithium available and are making
high level
plans for increased EV production without securing guaranteed battery metals supply. If the China spot market for technical & battery grade carbonate is your price reference point then everything looks under control. However, as previously mentioned, comparing
what passes for battery gradein China
(low or no battery warranties?) versus the far more
stringent requirements
(long term battery warranties) of
Korean and European OEM's
is where the validity of the China spot reference point fails miserably. On paper and in theory, based on incorrect information, it's possible to have "genuine" demand at 1,000K MT in 2025, unfortunately supply has no chance of matching that level, except on paper and in theory.
In the quest to make battery grade (ex China) chemicals a number of new producers (hard rock and brines) are producing below spec material. Spodumene concentrate at sub 6% grade and with elevated impurities is not translating
immediately
into battery grade chemicals
or not at all
. This is leading to an
oversupplied
technical grade market, one with a low growth rate (GDP related), causing spot prices to fall. Some of this material can be successfully reprocessed but the skills and capital required to achieve this are not abundantly available currently. It is for this reason that I highlighted the importance of processing skills and why Ganfeng Lithium is my top investment pick of the lithium "majors".
https://www.linkedin.com/pulse/jiangxi-ganfeng-lithium-co-1772-hk-top-investment-pick-rodney-hooper/
The lithium
supply reality
should now be apparent for all investors to see. There are incumbent "majors" with long histories (less so for Tianqi and Ganfeng) of production that have spent many years (and dollars) perfecting chemical production of
consistent
quality. The
time and cost
that it will take new market entrants to match the incumbents should not be underestimated. Given the harsh realities we have been faced with it makes complete sense for new entrants to
partner with experienced incumbents
, for example, Lithium Americas. Not only from a mining / chemical production perspective but also from a client / downstream relationship perspective.
So where does this leave us? Let's look at the where the most experienced and major producers are at currently regarding
supply growth for 2019
:
- Albemarle- 2019 - 3,000/t lost due to rain in the Atacama, ramp at Xinyu from increased Greenbushes output
- Ganfeng- ramp at new plants - new facilities substantially bigger than existing
- SQM- just announced that 2019 production will likely be slightly up on 2018
- Tianqi- ramp on increased Greenbushes output and Kwinana ramp
- China independent converters- quality of SC6.0 raw material & chemical quality
- Orocobre- rain will mean flat production for 2019
- Qinghai brines- region suffering economically, state backed company just defaulted on offshore loan
Recently Wood Mackenzie predicted lithium supply growth of 110K MT for 2019, 40% up on 2018. I labelled that unprecedented and unlikely. What I also proceeded to do is forecast 70K MT of supply growth, well above the ever insightful Tara Berrie / Ororcobre's 27-32K MT estimate. Following the latest set of announcements and rain issues my
2019 forecast
is now
~50K MT with a downward bias
. Compared to my stable
demand growth
estimate of
55-60K MT
that puts the market in a
supply shortfall of 5-10K MT for 2019
. As I expect demand growth to be almost exclusively battery storage related (requiring battery grade chemicals) the likely
supply shortfall in that segment is ~10-20K MT
. Translated, the
prices of battery grade chemicals are unlikely to come under pressure
unless we see a surprise
negative
NEV subsidy announcement out of China.
What is becoming a regular pattern is the
large disparity
between supply growth estimates from banks and incumbents versus the actual production achieved. The
lithium supply chain is consistently achieving only 10% to sub 20% annual growth (not all battery grade)
compared to
demand
which now seems set to grow at
20%+
for the next few years. Investment in new projects / conversion capacity is limited and construction / ramp ups are either seeing projects at outright development risk (Nemaska) or being delayed (Kwinana, Wodgina, most of the hard rocks and China converters). Given that experienced incumbents are struggling it is safe to assume that new entrants will
all
see delays / cost overruns.
Based on all the above it seems the lithium chemical supply chain is in crisis mode. Unless new projects are financed and existing projects that are financed but not built are expedited more quickly there is going to be a substantial shortfall in supply. There is no substitute for quality and that will limit growth and project selection even further. It would appear there is no brine versus hard rock debate, both are needed, urgently.
Mant thanks as always to the men and women of lithium for sharing their insights, to name a few: Joe Lowry & the lithium podcast team, Howard Klein, Tara Berrie & Orocobre, Gerrit Fuelling and Chris Berry
