CRU: Lithium Cost Fundamentals to Triumph Over “Market Hype”

Lithium prices will trade in the single digits in the long term as cost fundamentals triumph over market hype, CRU Group analysts said in a report published on Tuesday (August 20). 

“Many market players continue to forecast long-run prices for lithium in the mid-teens LCE (lithium carbonate equivalent), citing refinery bottlenecks and the potential for ramp-up delays in the mining and refining sector,” analysts at the firm said. “Based on previous experience in other commodities, CRU finds this argument unconvincing.”

CRU emphasized that it has been forecasting single-figure prices since late 2017.

“Many market players look to Chinese lithium spot prices as a bellwether of market health,” the CRU analysts stated, adding that the continued decline of lithium prices in China has put mounting pressure on the global lithium market.

Lithium demand from the Asian country has been lower than expected by analysts due to disappointing uptake of battery electric vehicles, which has been influenced by shrinking automotive sales and a sharp decline in electric vehicle subsidies.

Despite those circumstances, CRU forecasts some marginal improvements on the demand side in the coming months due to an expected busier buying season in Q4.

“However, we nonetheless believe that low spodumene prices … and ample conversion capacity will cause prices to continue their decline in the short-term,” the analysts said.

CRU’s spodumene production cost forecast is around US$525 per tonne, or US$8,000 tonnes LCE, with prices expected to fluctuate at that level in the long run in a relatively balanced market. The London-based firm estimates prices will naturally rise over time, but won’t reach the highs seen in 2017 to 2018.

“Conversion costs are also a significant element of lithium carbonate production, but we expect these to ease as capacity scale increases and further processing advancements are made,” the analysts said. “It is because of this that long-run lithium carbonate costs are unlikely to trend in the teens as has been widely claimed.”

Chinese major Tianqi Lithium (SZSE:002466) is expected to have its capacity reach 100,000 tonnes LCE by 2020 while Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460) is aiming for 200,000 tonnes LCE by 2025.

“We find the ‘refinery bottleneck’ argument largely unconvincing,” the CRU analysts said. “(The) Chinese refinery sector has proven time and time again that if conversion arbitrages are sufficiently high enough, they can ramp up conversion capacity at a tremendous pace.”

In the report, the analysts gave the example of how Chinese cobalt refiners were able to expand conversion capacity dramatically for production of cobalt sulfate, dropping sulfate’s premium over cobalt metal from US$10 to US$1.50 less than cobalt metal.

“While refinery bottlenecks could cause some short-term volatility in lithium prices (like in all commodity markets), they will not be enough to cause sustained high prices at unjustifiable levels.”

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.