Australia Battery Metals Update: Q1 2022 in Review

Australia battery metals market: Price strength remains

The COVID-19 pandemic brought supply chain problems and uncertainty, disrupting markets globally. Two years later, the world continues to fight the pandemic, and a new set of lockdown measures in China is putting pressure on markets.

However, the economic recovery that started in 2021 as countries reopened will continue in 2022, but at a slower pace, with the overall outlook for Australia’s mineral exports remaining firm.

For battery metals, the first quarter of the year was strong, with lithium and cobalt seeing healthy price environments throughout the period.

Lithium has seen its price increase more than 126 percent year-to-date, with prices climbing more than 480 percent year-on-year, according to Benchmark Mineral Intelligence data.

The main demand driver for lithium and cobalt is the electric vehicle industry, which had a stellar 2021 worldwide, particularly in the US and Europe, but also in Australia. In 2021, sales in the country tripled between 2020 and 2021, jumping from 6,900 electric vehicles sold to 20,665. These sales have also led to an increase in market share from 0.78 percent to 2 percent, according to the Electric Vehicle Council of Australia.

As sales of electric vehicles climb, automakers have been looking for ways to secure supply of raw materials. That’s why it comes as no surprise that in Q1, Australian junior miners Liontown Resources (ASX:LTR) and Core Lithium (ASX:CXO) inked lithium deals with Elon Musk’s Tesla (NASDAQ:TSLA).

In fact, Musk recently said that the “fundamental limiting factor” for EV adoption globally is battery production, and more specifically lithium. With demand for battery metals expected to soar throughout the coming decades, all eyes are on where the supply to meet the needs of the growing EV industry will come from.

Australia hosts the world’s largest lithium mine, Greenbushes, and is also home to key producers, including Pilbara Minerals (ASX:PLS), Allkem (ASX:ALK) and Mineral Resources (ASX:MRL).

In Q4 2021, Australian spodumene concentrate output rose by 33 percent year-on-year, and further capacity coming on stream in 2022 is expected to result in greater increases in production.

In February, Perth-based Pilbara Minerals posted its first half year profit of AU$114 million on the back of a strong lithium market, with shipments of spodumene concentrate reaching 170,228 dry metric tonnes (dmt), compared with 114,239 dmt a year ago.

“The result reflects continued improvement in lithium market conditions over the period, which has continued its strong momentum into the current half,” the company said in a statement.

Pilbara Minerals, which owns the lithium-tantalum Pilgangoora operation, has partnerships with Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460), General Lithium, Great Wall Motor Company (OTC Pink:GWLLF,HKEX:2333), POSCO (NYSE:PKX), CATL (SZSE:300750) and Yibin Tianyi.

Mineral Resources, in a joint venture with Ganfeng, saw Mt Marion’s spodumene concentrate total 207,000 tonnes in the second half of 2021. Meanwhile, the company’s Wodgina asset, which Mineral Resources is developing with Albemarle (NYSE:ALB), is expected to see its first spodumene production in the third quarter of 2022.

Greenbushes, which is operated by Talison Lithium, a joint venture between Albemarle and Tianqi-IGO (ASX:IGO), has three plants in operation that produced a total of 526,300 tonnes of spodumene concentrate in the second half of 2021.

Expansions in the next couple of years are expected to come primarily from South America, where a number of key producers, including Albemarle, SQM (NYSE:SQM) and Livent (NYSE:LTHM), have committed to increase supply.

Benchmark Mineral Intelligence senior analyst Daisy Jennings-Gray pointed out that while some lithium assets have been accelerated, potentially bringing extra supply to market in 2022, the project pipeline still faces delays, which underpins the widening deficit.

Going forward, based on current project announcements, Benchmark Mineral Intelligence expects this deficit to widen over the next couple of years as demand continues to outstrip supply. “However, a number of disruptors, such as novel technology breakthroughs, could ease this imbalance,” Jennings-Gray told INN.

Australia, the biggest lithium exporter in the world, is also eyeing the next step in the supply chain — with the production ramp up of two refineries expected between 2022 and 2023. In fact, the Office of the Chief Economist forecasts: "By 2024, Australia may have around 10 percent of global lithium hydroxide refining capacity, rising to 19 percent of global lithium refining by 2027."

Australia battery metals market: Cobalt hit by Russia-Ukraine war

Cobalt, another key battery metal, also experienced a spike in prices in 2021, doubling in value on the back of surging demand for electric vehicles.

During the first three months of 2022, cobalt's performance was mostly as expected, with strong demand continuing from battery markets and tight conditions persisting, Harry Fisher of CRU Group told the Investing News Network (INN).

“Russia’s invasion of Ukraine was of course the key shock which has tightened the screws further on the market,” he said. Russia is the world’s second largest producer of cobalt, with output reaching 7,600 tonnes in 2021, according to the US Geological Survey.

Availability of cobalt has been tight due to supply chain and logistical constraints since the second quarter of 2021, with the Russia-Ukraine conflict putting further pressure on supply.

“Downstream users, especially in Europe, are diversifying away from Russian material, considering logistical and payment challenges and the sustainability of doing business with companies based in Russia, even though there are no explicit sanctions on Russian cobalt or other battery metals, lithium and nickel,” Alice Yu of S&P Global Market Intelligence said.

Australia is currently the third-largest cobalt producing country in the world, after Russia and far behind leading producer the Democratic Republic of Congo.

There are currently four cobalt producing companies operational in Australia: Glencore (LSE:GLEN), BHP (ASX:BHP,LSE:BHP,NYSE:BHP), First Quantum Minerals (TSX:FM) and IGO, with Glencore being the dominant producer in the Australian market and the only company producing refined material. Moreover, there are a few cobalt companies developing projects that could help supply the battery market.

“There is expected to be significant growth in consumption, especially for cobalt chemicals, driven by growth in the battery sector and increased EV manufacturing,” according to a report by the OCE. “Mined cobalt production is expected to more than double by 2030 to meet the increase in demand, however this will require significant additional mine capacity to come online over that period.”

In the first quarter of the 2022 calendar year, Glencore made news headlines when it signed a cobalt supply agreement with US carmaker General Motors (NYSE:GM). The Anglo-Swiss company will provide GM with cobalt from its Murrin Murrin mine in Australia.

In other news, India and the Australian government announced that they will jointly put in $6 million for lithium and cobalt mine exploration in Australia over the next six months. During that period, due diligence processes and further investment decisions are expected to be made.

Australia battery metals market: What’s on the horizon

As the next three months of the calendar year unfold, investors interested in battery metals in Australia wonder what might be ahead for the country.

“Australia’s national export income and stock market will likely be jolted higher in Q2 and for the rest of the year, with the luckily commodity-rich country tipped to come out on top while the world braces for the big three Rs: record inflation, rising interest rates and a possible recession,” Jessica Amir, Australian Market Strategist at Saxo Markets, said.

Prices for lithium hit all-time highs in 2021 and are expected to continue to show strength as demand outstrips supply in the foreseeable future.

“Strong demand is currently resulting in shortages of spodumene, lithium hydroxide and lithium carbonate, which is pushing spot prices for all three commodities to record levels,” according to the Office of the Chief Economist. “Contract prices for spodumene are expected to increase strongly in 2022, driven by rising EV production and short term supply issues.”

This year, prices for spodumene are forecast to rise to an average US$1,300 per tonne, up from around US$660/tonne in 2021, while lithium hydroxide is expected to rise from US$17,970/tonne in 2021 to US$27,000/tonne in 2022.

In terms of Australia’s lithium production, output is projected to more than triple in the next five years, rising from 224,000 tonnes of lithium carbonate equivalent (LCE) in 2020 to 2021 to 692,000 tonnes of LCE in 2026 to 2027.

Meanwhile, Australia’s lithium export earnings are forecast to rise from AU$1 billion in 2020 to 2021 to AU$6.7 billion by 2027 (in real terms), as lithium hydroxide production rises. A further five lithium hydroxide refining operations are projected to start operations in the country by then.

Looking over to lithium stocks' performances, Saxo's Amir believes that in the long run, they are generally expected to be key beneficiaries of increasing demand for green energy. More directly, the ramp up in production of electric vehicles, driven by increased consumer uptake and government green subsidies, would have a hand in driving up lithium prices.

Despite this general trend, the analyst also believes that investors will need to look out for potential pitfalls when investing in lithium stocks.

“Often, the devil is in the details, and like all other commodities, location is key to determining whether a lithium producer holds supercharged prospects — factors such as mining geography, proximity to customers and mining majors are important things to look out for,” she said.

For cobalt, prices are expected to remain high in the next three months.

“They may start to adjust down slightly later this year if supply chains can start to normalize, although we are not anticipating a significant fall,” Fisher said. “Overall, the market is expected to be more balanced than in 2021 with further supply additions.”

A key trend investors continue to be interested in is the increased use of cobalt-free cathodes. Lithium-iron-phosphate (LFP) cathodes have been gaining market share, particularly in standard-range vehicles. In fact, Tesla said it used this type of cathode in nearly half of the models it produced in Q1.

“LFP has built market share in China through 2021 due to the popularity of mini EV models such as the Hongguang Mini ― but nickel-cobalt-manganese cathodes will hold ground for longer-range, larger and higher-performance vehicles,” Fisher said. “We expect that cobalt demand will remain robust for this reason despite LFP’s recent performance.”