The state of the lithium market, as I see it, is as...

The state of the lithium market, as I see it, is as follows:

DEMAND

• Demand is robust, over the past 18 months the consensus forecast to 2025 has risen 50%. Currently the average estimate is around 900K MT, my forecast is 1,000K MT (21% CAGR). For reference, 2018 supply / demand tonnage is ~265K MT LCE. Vehicle batteries dominate the future growth in lithium demand, whilst the transition to NMC 811 is acknowledged as the next preferred cathode chemistry, the timing and growth path of this adoption isn't clear. Hydroxide is the main beneficiary of the shift towards high nickel, increased energy density and faster charging batteries. However, the rise of solid state batteries, capable of providing a quantum leap in energy density, would mean lithium chloride / metal is required. If a commercial solid state battery is available by 2025 what will that mean for all the hydroxide conversion capacity being installed? Given the historic rate of change in demand growth, what will happen to 2025 forecasts if sub $100 kWh batteries are available by 2024 or earlier? The Benchmark Mineral Index now has over 60 planned battery "megafactories" totaling 1.3 TWh by 2028.

• The major headlines regarding EV's is still centered around "niche" vehicles like the Tesla Model 3, Jaguar I-Pace & Porsche Taycan etc. The cost of the battery pack relative to the vehicle price is still too high for cheaper EV's. VW et al are focusing on lower price model entries like the ID. At around $20,000 - $30,000 and competitive, this is key for me, the MEB platform is central to VW's plans. Building and refining EV's in the price range where the majority of cars are sold is where the battle needs to be won. Commercial vehicles and autonomous EV's offer further demand upside post 2020. The recent changes in the 2030 EU CO2 legislation all but guarantee the mass adoption of EV's in Europe.
• This is what a 21% compound growth rate looks like for demand going forward

SUPPLY

• The large incumbent chemical producers, or "big 4", continue to push the narrative that they can meet rising demand all on their own. Morgan Stanley and other brokers continue to share that belief and reinforce that narrative. As no futures contracts or over-the-counter alternatives have been introduced into the lithium market, the majority of sales still occur under term contracts; add the absence of financing facilities and there is almost a zero probability of "rogue" tonnage entering the market, so there shouldn't be unexpected supply surprises. The SUPPLY problem is the conversion of supposed nameplate capacity from corporate presentations into actual, achieved, chemical production. An additional concern is the quality of production. A surprising percentage of initial global lithium carbonate production is not battery quality. A surprisingly high percentage of spodumene concentrate (ex Greenbushes) produced is not 6% grade and in "spec". The end result has been poor capacity utilization rates at chemical converters and in some cases sub standard battery production (GM - A123 batteries below specifications). Another major supply issue is production out of the Salar de Atacama. For the 3rd year running production out of Chile is likely to be a flat ~75K MT (or less) in 2018. That's quite a reality considering lithium chemical prices have tripled during the past few years. SQM is currently upgrading its capacity and quality but will only produce 45K MT in 2018, however, based on my interpretation of export data, will likely hit an annualized production rate of 70K MT in December 2018. Historically SQM has achieved the equivalent of 58K MT in Q4 2016, well above 48K MT nameplate capacity. Peak summer and evaporation rates result in higher production. It's highly unlikely that SQM will achieve 90K MT or double 2018 in 2019. Morgan Stanley has SQM exiting 2019 on 120K MT equivalent or ~30K MT in Q4. My forecast remains sub 70K MT for the whole of 2019. Bearing in mind that SQM also needs to replenish inventories.
• Albemarle's woes in Chile continue. Between the increased lease payment rates, forced low price sales and indigenous royalties, the all-in effective cost of production at a $15,000/t Li2CO3 price is upward of $6,000/t - definitely not the lowest cost quartile for either SQM or Albemarle. Numerous brokers have 260K - 300K MT future production forecasts for the Salar de Atacama, my forecast is half that. Given closer scrutiny by various parties, there is still a possibility that existing brine pumping rates could be reduced in the future once a full environmental impact assessment has been independently completed.

• SQM has recently purchased a hard rock exploration asset in WA and Fortescue, LPI and others are exploring aggressively. In my opinion, there will be a number of mid sized (50MT+ Li02) projects emanating out of WA in the future. There will of course be others in Canada, USA, Brazil etc but the vast majority of future SC6 production will be WA based. Given substantial investments being made in hydroxide plants in WA the probability of vertical integration for new deposits is higher relative to other jurisdictions.
• Investors have yet to comprehend the extent to which the industry is increasing production. Historical conversion plants were nowhere near the size of what's being built today. The hydroxide market is ~65K MT in 2018, demand in 6 years time is estimated at 400K MT. Development delays, unexpected maintenance shut downs etc are a certainty.

CORPORATE ACTIVITY

• If lithium is so abundant and readily found, why don't the majors grow organically? Why don't the majors tackle more greenfield projects that cost very little to buy or explore? Why do the majors and downstream end users choose to continue to pay full prices for JV's / offtakes / acquisitions? The answer is simple - economic lithium deposits, with supporting infrastructure, low political risk etc aren't easy to discover / develop. The truth is it takes close to 10 years to discover. drill, permit, develop, finance, build and ramp / refine production at a project to reach battery quality (if ever). There is a very low probability that new quality deposits will match the scale / grade of Greenbushes and the Salar de Atacama. The market is making do with the "best of the rest". Not an easy proposition when there are examples of difficulties in ramping existing world class operations (La Negra II).
• There is a huge discrepancy between the prices paid to secure offtake / JV's / acquire projects and the valuations of other independent, developing listed companies. Are the acquirers overpaying or is future supply that tight? In my opinion demand is real, almost all production or planned production to 2021 is spoken for. Supply however, isn't "real", it's projected. Companies are looking to acquire or buy into projects that are 5+ years into the 10-year development cycle with an acceptable scale / cost of production and location etc. It's not a perfect strategy but it's all that's on offer and a long life project at least offers the offtake partner / acquirer the chance to perfect the process over time. The other strategy available to the majors, with premium EV / EBITDA / P/E multiples, is to buy undervalued in-production companies. This often doesn't result in new supply but would be value accretive to shareholders (likely candidates ALB, Livent).
• In 2019 I expect the following brine projects to secure financing:

- Galaxy (Sal de Vida)

- Lithium Power International / Bearing (MSB JV)

- Neo Lithium Corp (3 Q's)

CONCLUSION:

• Most lithium equities have started 2019 at or near their 52-week lows.
• Lithium prices have trended downward, the China EXW prices for carbonate have plummeted in the past 12-months but represent a very small percentage of the overall market.
• Demand remains robust and suppliers are securing term contracts for most of their production. With that said, GEM effectively reneged on its term cobalt contract with Glencore - for now this is unlikely to happen to lithium but something worth noting.
• The majors and downstream end users will continue to execute deals with the "best of the rest" deposits - they need "near term" production to meet growing demand and don't have 10 years to develop greenfield projects. WA has the greatest potential to deliver new mid sized hard rock projects with vertical integration upside. Recent share price moves highlight the risk of spodumene concentrate only projects and the risk of being a converter only without cheap feed stock in a declining chemical spot market. Vertical integration is key and brine deposits effectively meet this criteria for carbonate whilst still offering chloride as upside should solid state batteries take off.
• Lithium is a specialty chemical and the industry is evolving quickly. Many thanks to those that continue to travel the world and share their valuable insights, to name a few - Joe Lowry / Global Lithium Podcast, Howard Klein, Tara Berrie (Orocobre) and Chris Berry.