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Lithium Market Update: Q1 2023 in Review
Lithium prices have fallen from recent highs, but experts remain confident in the long-term outlook for the battery metal. Find out what moved the market in Q1.
Lithium has been under pressure in recent months following a rally that saw prices hit all-time highs in 2022.
But demand for the battery metal is expected to soar in the coming decades, with questions about where supply will come from still to be answered.
How did lithium perform in the first quarter of 2023, and what’s ahead for the commodity in the near term? Read on for an overview of the main news that impacted the lithium market in Q1, plus a look at factors investors should watch for the rest of the year.
How did lithium prices perform in Q1?
Lithium prices in China have been on a downward trend since November, although they remain at historically high levels.
For Fastmarkets, lithium's Q1 performance was for the most part unsurprising — the agency was expecting prices to peak by the end of 2022 and then head lower.
“We expected this to happen as a result of the producer response that was underway with the ramp up of new supply, especially spodumene and lepidolite in China, expansions and the restart of idle capacity,” William Adams, the firm's head of base and battery metals research, told the Investing News Network (INN).
Additionally, Adams said record high lithium prices were attracting direct shipments of ore to China, which in effect was bringing forward the supply response.
“I do admit that prices came down faster and further than we thought likely … we were not expecting demand to retreat as much as it has, which was brought on by the severe COVID-19 hit China suffered towards the end of 2022,” he said. “The drop in price prompted destocking, which in turn has made apparent demand look worse than actual demand.”
Additionally, original equipment manufacturers (OEMs) have been discounting price tags for internal combustion engine vehicles ahead of emission standard changes in July. “This has taken market share from electric vehicles (EVs),” Adams said.
Lithium carbonate is widely used by lithium-iron-phosphate battery makers in China, so it makes sense that lithium carbonate prices have been hit the hardest.
“The battery and cathode active material manufacturers are the ones sitting on inventory, so we expect lithium carbonate to remain at a discount to lithium hydroxide,” Adams said.
Spodumene prices have remained high, with the Australian government expecting average realized prices to rise from US$3,110 per tonne in 2022 to US$4,350 in 2023. To put that into perspective, spodumene prices were hovering around the US$425 level in 2020.
“Many Australian spodumene contracts are tied to indexes in seaborne Asia markets, which have been higher than China,” Adam Megginson, price analyst at Benchmark Mineral Intelligence, told INN.
“It will be interesting to see if hydroxide maintains its wide premium to carbonate in Q2, and what the chemical pricing situation is when price clauses in spodumene contracts shift downwards to reflect the lower-price environment seen in Q1.”
Commenting on why hydroxide prices have fallen less than carbonate, Megginson said carbonate is more susceptible to sentiment as it is favored by traders.
“Hydroxide is a structurally smaller market, which means supply remained tighter than carbonate as overall lithium chemical demand fell,” he said. “A lot is also shipped overseas to Japan and South Korea, where demand has been more stable.”
Lithium supply and demand dynamics in 2023
Even though the energy storage segment is picking up pace, demand from the EV space remains a key driver for lithium, with Q1 seeing weaker demand than analysts had expected .
“The aftermath of the massive COVID-19 hit China suffered in late 2022 led to a build up of EV inventory at dealerships,” Adams said. “(Furthermore), the weaker property market in China has led to households being more cautious with their spending, plus competition from discounted internal combustion engine vehicles have had an impact.”
Outside of China, the parts shortage, especially for semiconductors, has restrained the production of EVs, leading to less demand for battery raw materials, Adams said.
“But we think there is considerable pent-up demand for EVs in Europe and the US, judging by the long EV waiting lists,” he added.
Following a strong end to 2022, Benchmark Mineral Intelligence was expecting EV demand to cool from the start of 2023. For Megginson, that points to the seasonality usually seen at the start of the year in the Chinese EV market.
“For lithium, this means Q1 pricing tends to be lower and Q4 pricing tends to be higher,” he said. “Although a combination of factors, including COVID-19 precautions in China and the extreme supply tightness scenario, meant we didn’t see this seasonality last year.”
Year-to-date, EV sales have been recovering at a steady pace, while the energy storage and portable markets have seen quite stable demand.
“If the current trend of steady month-on-month increases in EV demand continues through Q2, we could see an uptick in lithium purchasing activity,” Megginson said. “Although inventory built up at different points in the supply chain — particularly finished products sat with cell manufacturers — could delay purchasing of material.”
When it comes to supply, talks about whether the market will be flooded with new supply or remain tight continue to be a topic of discussion for investors. For Fastmarkets, the current surplus the market is experiencing is temporary.
“The year is likely to be a year of two halves — surplus the early part of the first half switching to tightness later in the second half,” Adams said.
He added that some of the excess material has come from high-cost supply, much of which is likely to be halted.
“The key to watch is whether inventory is held in tight hands, and whether when demand recovers there is a rush to restock after the destocking that has been dominating in recent quarters,” he said.
Meanwhile, Benchmark Mineral Intelligence is forecasting that the lithium chemicals market will remain in deficit in 2023.
“But in the short term, inventory has built up with producers and converters over Q1 2023, so it will take some time for the supply chain to work through this material,” Megginson said.
OEMs look for supply, M&A activity picking up
Another trend seen in the first quarter of the year has been OEMs' increased interest in securing supply. These moves come at a time when governments from the US to China have pledged to phase out internal combustion engine cars, while carmakers have set ambitious targets to electrify their fleets.
A deal that was inked in January grabbed the attention of investors and industry analysts alike — Detroit-based GM (NYSE:GM) will make a US$650 million equity investment in Lithium Americas (TSX:LAC,NYSE:LAC) to develop the Thacker Pass asset in Nevada. This represents the largest investment ever by an automaker to produce battery raw materials.
“Strong demand means we expect to see more activity in terms of downstream players moving upstream, either via direct investment in lithium-mining projects or through offtake,” Megginson said. “For now, the market remains very diverse with a multitude of players, but pricing will dictate the extent of market consolidation.”
Later in the quarter, merger and acquisition activity also picked up. Top lithium producer Albemarle (NYSE:ALB) made a US$3.7 billion takeover offer for Liontown Resources (ASX:LTR,OTC Pink:LINRF), which was rejected. Another Australian company, Essential Metals (ASX:ESS,OTC Pink:PIONF), declined a bid from the joint venture formed by Tianqi Lithium (OTC Pink:TQLCF,SZSE:002466) and IGO (ASX:IGO,OTC Pink:IPGDF).
“These lower prices are likely to encourage more M&A,” Adams said.
What's ahead for the lithium market in 2023?
The second quarter of the year is well underway, and there are a few key catalysts lithium-focused investors should keep an eye on.
Megginson said there are early signs of price stability in the Chinese market.
“However, traders outside of China and bulk consumers are more bearish, with the latter reluctant to start restocking. So there is definitely conflicting sentiment on where prices are moving in the market,” he said.
Commenting on prices, Adams pointed out that levels are still dropping in April and may have further to fall.
“But we are now seeing production cuts at some of the higher-cost lepidolite operations in China,” he said. “We expect the price fall will make direct shipments of ore and the processing of tailings uneconomical, so we expect supply to tighten.”
A key factor to watch in the next few months is more announcements from OEMs looking to secure supply.
“(What's more), China has been stepping up its lending — that should lead to a (delayed) stronger economic recovery,” Adams said. “(Also), as the parts shortage fades, the EU/US OEMs are likely to lift EV production rates.”
As Q2 began, the lithium space was hit with news from top producer Chile, which has decided to nationalize its lithium industry.
“It will be interesting if this has implications for future projects in the country versus its neighbors, although near-term impact is set to be minimal,” Megginson said.
Don’t forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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