Last week Goldman Sachs published a research note entitled “Battery Metals Watch: The End of the beginning.”
While it is not Benchmark Mineral Intelligence policy to comment on other reports, we felt the note sent incorrect signals to the market and, therefore, we are pleased to outline our view as has been requested by industry and investors alike.
Goldman Sachs said it expected the lithium market “to pivot towards a prolonged phase of surplus starting this year.”
Due to the shock to the investment markets and many requests for a response, Benchmark is outlining its reasons why we believe the call on lithium was wrong.
The industry cannot rely on China feedstock meeting the market
Goldman sees the most “significant” new lithium supply as coming from China, where companies have invested in new hard rock and brine projects.
But known domestic Chinese spodumene and other hard rock resources are low quality, a key reason why there has been an increasing reliance by Chinese converters on Australia for supply instead.
Chinese brine resources are also low quality and have always struggled to produce meaningful volumes of lithium into the market, let alone of battery-grade quality.
Production of lithium from China’s Qinghai province has struggled to ramp up production despite over a decade of efforts, including by electric car maker BYD.
China’s deposits of lepidolite, which Goldman expects to add significant new supply volumes, may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply. Chinese lepidolite processing has a high waste-to-ore ratio of 20:1, subsequent high waste-disposal costs, and high processing costs, all of which make it a marginal source of lithium. Associated opex and ramp up times are also commonly underestimated.
Capacity does not equal supply
Building capacity in the lithium market does not equal supply, particularly in China, where companies often need to separate designed capacity from effective capacity. Of that capacity, recovery rates apply – the rock you dig out of the ground will not all make it into a car.
Even outside of China, planning does not always equal reality, with recent efforts to build lithium processing facilities suffering from rising costs and delays.
Tianqi Lithium’s Kwinana lithium hydroxide refinery in Western Australia was announced in late 2016 and set to start at the end of 2018. Instead, first production occurred in the second quarter of this year, with full production targeted for 2025.
“Building upstream of the EV battery supply chain takes time and rarely goes to plan,” Simon Moores, chief executive of Benchmark Mineral Intelligence, said. “For Tianqi it’s been the best part of a decade.”
New lithium supply comes at a higher cost base
As demand for lithium grows, deposits with unconventional mineralogy, lower grades, and higher strip ratios will be developed. But at the same time, the advent of new, often smaller and inexperienced converters with unintegrated feedstock sources will mean that the costs of conversion increases, and recovery rates stagnate.
In the last two years, higher inflation, supply chain bottlenecks and cost-blowouts have pushed incentive prices higher. Some new lithium supply also relies on new technologies which will add higher costs.
As a result it’s unlikely that lithium prices will drop back down to previous lows.
Contract pricing is important as the market balances
Benchmark tracks the volume of lithium under contracts and spot prices, and forecasts prices accordingly. A large portion of the market is under long term fixed price contracts, and an equally significant portion is under contract with variable prices. These must be taken into account when balancing global prices in the current market, but also forecasting for the next two to three years.
Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark’s Lithium Forecast. Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now.
It’s important to remember that there is no one single lithium price.
Understanding how lithium chemical capacity is used is crucial
A lot of lithium chemical capacity is being used to reprocess material that does not meet downstream specifications. This eats up existing capacity and merely represents lower efficiency production rather than the introduction of new lithium units to market.
When the rest of the world slowed its lithium investment in the trough of the previous price cycle, China remained aggressively committed to adding conversion capacity; often from relative newcomers to the industry.
Not only will a lot of this new capacity operate at a low utilisation rate in the initial years of production (if not, indefinitely), a significant proportion of capacity that does find its way to market is locked into reprocessing or tolling arrangements which will not address the underlying market shortfall.
Conclusion: Lithium market remains in structural shortage until 2025
The lithium market will balance over the next few years, but it’s unlikely that an unprecedented rampup of marginal, unconventional feedstock will fill the deficit. It is also unlikely that demand will weaken significantly.
It will be a touch-and-go market balance; but there will not be the structural oversupply that Goldman Sachs is predicting.
In a period when we’ve seen prices top record highs persistently over the past 10 months, a correction in the lofty spot market prices seen in China is likely. End-users can only absorb so much cost pass through before it has an unsustainable impact on their electric vehicle ambitions.
However, the spot market price in China does not represent the true price of lithium in the market, and is often not the true price being paid by western battery majors.
In these markets we expect to see a gradual ramp up in contract deals being settled with increasingly flexible, and more frequent, pricing mechanisms.
As the market wrestles between long-term supply security to fuel the lithium ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning.
UNDERSTAND THE SUPPLY CHAIN, FROM LITHIUM MINE TO BATTERY CELL
Benchmark’s Lithium Forecast provides you with analysis, data, and our forecast on the full lithium supply chain, from the mine through to the battery cell. Fill in the form below to subscribe to Benchmark’s Lithium Forecast today.