Thanks @Just_Westy for highlight this tweet... here's a copy of the whole article for those without LinkedIn (sorry the graphics haven't worked properly??)
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 publiclydisclosed 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 Albemarleincluded 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 levelplans 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'sis 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 forecastis now ~50K MT with a downward bias. Compared to my stable demand growthestimate of 55-60K MTthat 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 disparitybetween 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 demandwhich 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 allsee 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
GLN Price at posting:
55.0¢ Sentiment: Hold Disclosure: Held
(20min delay)
