How will COVID-19 impact lithium mining in Argentina? Jose Hofer of Benchmark Mineral Intelligence shares his thoughts.
COVID-19 has brought uncertainty to every market, and lithium has been no exception, with top-producing countries implementing measures that could impact the space beyond the outbreak.
In Argentina, government measures were taken early on, with a lockdown declared on March 19; it is still ongoing for major cities as President Alberto Fernandez extended the quarantine last Friday (April 10), saying he believes it is the best way to slow the spread of the virus.
Lithium miners in the country stopped operations from March 19 to 31, including top producer Livent’s (NYSE:LTHM) Hombre Muerto, Orocobre’s (TSX:ORL,ASX:ORE) Olaroz, Lithium Americas’ (NYSE:LAC,TSX:LAC) Cauchari-Olaroz and Neo Lithium’s (TSXV:NLC) Tres Quebradas.
In early April, mining was deemed an essential industry in Argentina, allowing lithium miners to resume activities; however, many companies are revising their expansion plans and capital spending on future projects as economic volatility increases.
But it is still too early to say what will be the biggest challenge for the South American country once the outbreak is finally under control, Benchmark Mineral Intelligence Senior Analyst Jose Hofer told the Investing News Network.
Providing details on the spread of the pandemic in Argentina, the expert, who previously worked at Chile’s SQM (NYSE:SQM), said most cases are located in the province and city of Buenos Aires, while Salta, Catamarca and Jujuy combined only account for less than 1 percent of the cases.
“In that respect, lithium operations are quite isolated from the pandemic outburst,” he said. “However, logistics continue to be an issue in terms of supplies. So far, the constraints on logistics have been mild, but still present.”
Speaking about the impact on the local economy, Hofer explained that Argentina has postponed the payment of capital interests and amortizations with respect to the public debt that the country holds.
“Reasons behind this are the detriment of both the economic and social situation and the need to ensure the sustainability of public debt under the effects of COVID-19,” he said. “The latter, combined with the devaluation of the (Argentine) peso, has raised concerns about the possibility of another default.”
Looking at how all the government measures, not only in Argentina, but also in neighboring lithium powerhouse Chile, could impact the forecast for lithium in 2020, Hofer said Benchmark Mineral Intelligence has downgraded both its demand and supply estimations for this year.
He explained that the rapid spread of COVID-19 throughout Q1 had a severe impact on global economic output, lowering the outlook for lithium demand in 2020.
“We see a bigger demand-side impact, with supply having to be scaled back in response to this,” Hofer said. “Total battery demand has been lowered to 196,000 MWh as a result of (an expected decline in electric vehicle sales) and the wider economic turbulence of 2020, with lithium demand being adjusted down by 9 percent to 316,000 tonnes.”
Benchmark Mineral Intelligence’s supply forecast was also downgraded in response to the slowdown in global expansions and the subsequent closures that have been enforced as a result of the coronavirus outbreak, with output now expected to reach 325,000 tonnes.
“Several projects in Australia have announced reduced production with respect to 2019, while other strategic movements following demand changes,” he said.
“Brine projects in South America have not announced adjustments in their production, but forced halts in Argentina are being reflected in our supply model. Even though not publicly announced, production from Chile has still important challenges in terms of quality.”
Since COVID-19 started to spread in China, logistics was an issue during January and February, Hofer explained.
“More than issues with ports, the main bottleneck has been the increase of transportations costs and availability of feedstock needed for refining,” he added.
An additional issue that is equally important has been the transportation of workers, with many industries in China operating at rates of 55 to 65 percent of their capacity during January and February.
“Today the situation is more promising, with the possibility of the Chinese economy rebounding in the second semester. This could compensate for the poor performance of the 2019 electric vehicle sector.”
To put that into the context of South American producers, Livent’s exports are headed to the US and China, while Orocobre ships most of its material to Japan.
“So the importance of those destinations having safe and functional supply chains is crucial,” he said.
Looking ahead, Hofer said in the next two to three years, the severe impact COVID-19 has had on the global economy will force many lithium companies to revise their expansions — at a time when the need for supply to meet the increasing demand will be essential.
Last week, French company Eramet (OTC Pink:ERMAY) decided not to engage in the construction of its lithium carbonate plant in Argentina, which had been running for four months, while Vancouver-based Lithium Americas halted the construction of its Cauchari-Olaroz lithium project in Jujuy, which will impact the company’s previous estimate for completion of construction by early 2021.
“Most probably other projects will be delayed in the next couple of months. In fact, there are no new operations entering the market this 2020 and we can expect a similar trend for 2021,” Hofer said.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
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