Chinese lithium hydroxide price restores its premium over carbonate

Benchmark’s May 2021 Lithium Price Assessment saw lithium hydroxide restore its historical premium to lithium carbonate in the Chinese domestic market after the traditional price relationship between the chemicals inverted at the beginning of the year.

In January 2021, carbonate prices rallied on strong demand from LFP cathode manufacturers, inverting the historical relationship as hydroxide pricing moved to a discount on battery-grade carbonate; with hydroxide sitting firmly below both battery and technical grade carbonate in Benchmark’s Lithium Price Assessments from February through to April.

At its strongest premium through this period, Chinese battery-grade carbonate sat RMB 19,500/tonne ($3000) above hydroxide in the Benchmark mid-March 2021 price assessment, with battery-grade carbonate prices at RMB 82,000/tonne ($12,625) and hydroxide prices at 62,500/tonne ($9,625), as assessed by Benchmark.

However, hydroxide prices in the Chinese domestic market began to play catch-up in recent months, eventually exceeding carbonate, gaining 33.8% (EXW China) across April and May, compared to Chinese battery-grade carbonate gains of 5.3% (EXW China) in the same period; a significant slowing down from the rally in Q1.

Hydroxide’s historic premium

Historically, lithium hydroxide has held a premium over carbonate in both the Chinese and international markets.

Hydroxide has typically sat above carbonate in international and Chinese market, due to the chemical’s traditional production method of being a product processed from lithium carbonate, rather than directly produced from spodumene feedstock as is common in today’s market. Consequently, a conversion cost of $1000-1500/tonne has historically been priced into hydroxide throughout the market’s history.

Changing feedstock supply, use dynamics and cathode evolution has seen this historic price relationship weakened in recent years.

Additionally, hydroxide production capacity has been scanter as a result of previous market trends which have driven for higher consumption of low-nickel and lithium iron phosphate (LFP) cathodes. As such, the chemical is at a higher risk of supply tightness as processors struggle to meet soaring demand from the battery industry.

Q1 2021 role reversal

Whilst this historic price relationship remained the case in international markets throughout early 2021, carbonate rallied to a premium to hydroxide in the Chinese domestic market through Q1.

This Q1 carbonate rally was largely driven by strong demand as the global EV market, buoyed by widespread stimulus and incentives put in place by governments, recovered post-COVID. This demand was even further boosted in China by resurging LFP cathode demand which utilises lithium carbonate in its production.

Meanwhile, demand for high-nickel cathode chemistries, which use lithium hydroxide for feedstock, had not taken off as quickly as expected, keeping price gains for lithium hydroxide limited in late 2020 and into early 2021.

Additionally, in a bullish market carbonate prices become very sensitive to shifts in demand, where small imbalances can have an outsized effect on pricing due to the relative volume of the carbonate market and the number of active players vying for material.

In late 2017 and early 2018, Chinese hydroxide also found itself at a discount to carbonate, highlighting that although the two chemicals rely on common feedstocks, the individual supply-demand balance of these products has always been distinct enough to invert the price relationship if market trends support this.

Chinese hydroxide restores its position above carbonate

However, demand for lithium hydroxide continues to rise as production of high-nickel cathode cells has begun to climb, alongside processors preferentially sourcing hydroxide – where possible taking advantage of the comparatively cheaper chemical – boosting demand for hydroxide and reversing this short-lived discount to carbonate.

Chinese domestic hydroxide prices assessed by Benchmark at the end of May sat at an average of RMB 91,000/tonne ($14,275), compared to RMB 82,500/tonne ($12,950) and RMB 89,000/tonne ($13,975), for technical and battery grade carbonate respectively, on an EXW China basis

So far in 2021, demand for nickel containing chemistries has gone from strength to strength with an average of 6.1GWh of NCM and NCA cathode cells produced every month in China, compared to the two-year average across 2019 and 2020 of 4.3GWh per month.

Downstream demand from Japan and South Korea supports this notion, with lithium hydroxide exports out of China to the rest of Asia increasing by an average of 5% per month so far in 2021 compared to average monthly exports in 2020.

On the flip side, carbonate price increases have tailed off as the market holds off buying further inventory at elevated prices and added supply from Qinghai brine projects in China has begun to filter through to the market. As such, supply tightness is now being eased by additional carbonate supply, whereas the same is not happening for hydroxide.

Looking forward, the historic price relationship between hydroxide and carbonate may not be as clear cut as it has been in the past, primarily due to newer Chinese conversion facilities being able to produce hydroxide directly from the rapidly expanding spodumene feedstock market, therefore removing the some of the additional conversion cost by skipping the carbonate step and theoretically reducing the premium over carbonate.

In addition, whilst there will always been a price relationship between the two chemicals due to their reliance on common feedstocks, the hydroxide premium may narrow over time, especially as newer Chinese conversion capacity is flexible and therefore able to favour the premium product and bring prices back to parity by adding additional supply to the market.

Benchmark forecast NCM cathodes to represent over 75% of cathode market share by 2030, with well over half of these being the 811 high-nickel variety, meaning demand for lithium hydroxide is only set to rise further and challenge the already delicate supply-demand balance, supporting Benchmark’s expectations of further rising prices in the Chinese domestic hydroxide market.

Ultimately, whilst the higher price environment has started to incentivise supply investments, there is still a long way to go to meet the looming deficit that is already becoming evident in the market today. As such both hydroxide and carbonate prices are set to rise in as the market tightens against surging battery demand.