Australia Battery Metals Update: Q2 2022 in Review

Australia battery metals market: Prices stabilize, EV industry faces challenges

For battery metals, the first quarter of the year was strong, with lithium and cobalt seeing healthy price environments throughout the period. In the second quarter, battery metals demand experienced a temporary pull back on the back of a slowdown from the electric vehicle sector.

That said, the price of lithium has increased more than 120 percent year-to-date, with prices climbing more than 355 percent year-on-year, according to Benchmark Mineral Intelligence data.

The main demand driver for lithium and cobalt is the EV industry, which faced supply chain challenges throughout the quarter. Carmakers are struggling to meet production goals and costs keep rising.

“Lockdowns in China, in addition to the uncertainty regarding the economy and the war in Ukraine — and its impact on supply chains — is finally affecting EVs as well,” Felipe Munoz of JATO Dynamics told INN. “They used to be the only drivers of growth, but now we are also seeing the demand for these cars falling not because the people don't want them, but because there are no cars available.”

In Australia, the number one barrier to transport electrification today is the low supply of electric vehicle models, the Electric Vehicle Council said in a recent report.

“There are hundreds of EV models available overseas, and yet only a fraction of these are being supplied to Australia,” the report reads. “This barrier is primarily due to Australia’s lack of mandatory fuel efficiency targets, combined with a lack of national purchase incentives.”

In 2021, sales in the country tripled from the previous year to 20,665 electric vehicles sold, up from 6,900 in 2020. This increase represents a 2 percent market share of all sales, compared to 0.78 percent in 2020, according to the Electric Vehicle Council of Australia.

Australia battery metals market: Lithium market expected to be tight

With demand for battery metals expected to remain strong throughout the coming decades, all eyes are on where the supply to meet the needs of this 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).

Australia lithium production is expected to increase in 2022 as further capacity comes on stream, although miners continue to face hurdles.

In February, Perth-based Pilbara Minerals production for the quarter was 127,236 dry metric tonnes (dmt) of spodumene concentrate — a 56 percent increase from the previous three month period. This included first concentrate from the Ngungaju Plant’s fines circuit, which the company expects to ramp to achieve nameplate production of 180,000 to 200,000 tonnes per year in the next three months.

“The quarter’s strong production performance was achieved despite various operational challenges, including impacts from COVID-19 and associated labour shortages experienced across the mining sector,” the company said in a statement.

Mineral Resources, in joint venture with Ganfeng, saw Mt Marion’s production reach 128,000 dmt during the June quarter. It also shipped 141,000 dmt of spodumene concentrate.

“Mt Marion ore mined was steady qoq, but lower year-on-year because of continued mining of transitional ore located in the upper levels of the new stage of the pit, as well as the impact of a reduced operational workforce from COVID-19,” the company said.

Production at Greenbushes — operated by Talison Lithium, a joint venture between Albemarle (NYSE:ALB) and Tianqi-IGO (ASX:IGO) — was up 25 percent quarter-on-quarter at 338,000 tonnes of spodumene concentrate.

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

Benchmark Mineral Intelligence senior analyst Daisy Jennings-Gray told INN 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. All in all, the market still looks to be tight heading to the end of 2022.

“There are some expansion ambitions in the pipeline that could provide some additional supply-side relief if project timelines are met. However, it seems unlikely this will balance strong demand from the EV industry,” Jennings-Gray said.

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 (OCE) is forecasting that 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. Similar to lithium, prices stabilized in the second quarter of the year, but the long term prospects for the metal remain firm.

During the first half of 2022, cobalt's performance was mostly as expected, as demand from the EV industry slowed in Q2 hitting demand for the metal.

“Price dynamics shifted considerably in Q2 as Shanghai experienced a long COVID-19 lockdown and battery demand growth in China softened,” Harry Fisher of CRU Group told INN.

Chinese cobalt metal prices fell from the equivalent of around US$40 per pound to US$25 by the end of the three month period, according to CRU data.

“European prices only fell to around US$35 over the same period, as Chinese demand suffered more considerably due to the lockdowns and non-battery European demand continued to recover,” Fisher said. “That being said, European prices have fallen further in early July to the low US$30s as the disconnect with Chinese prices narrows.”

Australia is currently the third-largest cobalt producing country in the world, after Russia and far behind leading producer the Democratic Republic of Congo (DRC). In 2022, CRU forecasts mined supply to increase by more than 42,000 tonnes, up 26 percent year-on-year.

Cobalt supply chain and logistics issues remain and have been exacerbated by the war in Ukraine and bottlenecks due to Chinese restrictions.

“Supply chain constraints are unlikely to recover substantially until at least next year, which will slow exports of additional volumes from the DRC in particular,” Fisher said.

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.”

Australia battery metals market: What’s on the horizon

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

Prices for lithium are expected to continue to show strength as demand outstrips supply in the foreseeable future, with some experts believing the peak in prices is yet to be seen.

“Considerable uncertainty exists, given recent rapid price movements and the general immaturity of the market,” the OCE says in its latest lithium report. “While expansions to production are already underway in Australia and overseas, long lead times for lithium mine and brine operations and the potential for delays in bringing such large volumes of lithium into production mean risks remain of supply shortages persisting over the next few years.”

This year, prices for spodumene are forecast to rise to an average US$2,235 a tonne, up from around US$675 a tonne in 2021, while lithium hydroxide is expected to rise from US$17,370 a tonne in 2021 to US$35,570 a tonne in 2022.

In terms of Australia’s lithium production, output is projected to grow at 20 percent per year. Production is expected to rise from 218,000 tonnes of LCE in 2020–21 to 278,000 tonnes of LCE in 2021–22, growing to 438,000 tonnes in 2023–24.

Meanwhile, Australia’s lithium export is forecast to lift from AU$1.1 billion in 2020–21 to AU$4.1 billion in 2021–22 on the back of record spodumene prices. Production from lithium hydroxide refineries is forecast to steadily add to earnings over the outlook period, lifting total annual lithium export revenue to AU$9.4 billion by 2023–24.

For cobalt, prices are expected to plateau in the next three months before they pick up again in the fourth quarter, according to CRU.

In terms of demand, the recent curtailment of demand from the EV industry is a temporary issue led primarily by COVID-19 lockdowns in China.

“Chinese EV and battery production figures are now starting to exceed pre-lockdown levels,” Hughes said. “Although this demand has not yet materialized upstream, as refiners are working through existing inventories, there is likely to be a period of restocking in Q3."

Non-battery demand in Europe and the US continues to improve, which has buoyed prices slightly during the Chinese market volatility.

“Aerospace demand for cobalt-containing superalloys is also consistently rising as travel begins to normalize – this will continue as flight travel will take more time to recover to pre-COVID levels,” Fisher said.