Lithium Market Update: Q2 2019 in Review

- July 18th, 2019

What happened to lithium in Q2 2019? Our lithium market update outlines key developments and explores what could happen moving forward.

The lithium space continued to receive a lot of attention during the second quarter of the year, and, despite the downtrend in prices and stocks,many remain bullish on the future of the metal.

Demand for lithium is forecast to triple by 2025, as demand for lithium carbonate and hydroxide, which are used in lithium-ion batteries, continues to increase.

How did the metal perform in the second quarter of 2019, and what’s ahead for lithium in the near term? Read on for an overview of the factors that impacted the lithium market in Q2, plus a look at what investors should watch out for the rest of the year.

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Lithium market update: Supply and demand

The second quarter of the year was full of news and announcements from lithium majors and junior companies.

During the period, top producers released their earnings for the first three months of the year, with Chile’s SQM (NYSE:SQM) reporting a 30 percent fall due to lower margins in its lithium business. 

Argentina-focused Livent (NYSE:LTHMreported weaker demand for its lithium hydroxide in Q1 due to a slower shift to higher nickel cathode batteries. Albemarle (NYSE:ALB) also experienced a drop in lithium sales in the first quarter, but its was due to heavy rains.

Despite disappointing prices throughout the quarter, all producers agree on the long-term demand outlook for lithium.

Lithium carbonate and lithium hydroxide demand is expected to continue to grow at double-digit rates in the future. … Significantly more supply of both products will be needed,” SQM CEO Ricardo Ramos said in May.

Looking over to supply, a producer that continued to make news headlines in Q2 was Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460).

The Chinese company has been increasing its dominance in the lithium space this year. In April, Ganfeng announced a US$160 million investment in Lithium Americas’ (NYSE:LAC,TSX:LAC) Cauchari Olaroz project in Argentina, increasing its stake from 37.5 percent to 50 percent.

The same month, the company made news when it inked a long-term lithium deal with German carmaker Volkswagen (OTC Pink:VLKAF,FWB:VOW), and in May, the miner announced a GBP 14.4 million strategic investment in Bacanora Lithium (LSE:BCN) for the development of its Sonora lithium clay project in Mexico.

But one of the most talked about deals of the quarter was diversified company Wesfarmers’ (ASX:WES,OTC Pink:WFAFF) AU$776 million takeover offer for Australian lithium developer Kidman Resources (ASX:KDR,OTC Pink:KDDRF).

According to Benchmark Mineral Intelligence, Wesfarmers could be the first in a wave of large diversified conglomerates that contemplate serious plays in the battery metals space.

“It also represents the migration of capital towards the energy storage supply chain, from companies that typically operate in larger, established commodity markets,” Benchmark Mineral Intelligence analysts said in a post.

The development of supply chains and the security of raw materials to feed that value chain were also key trends in the space in Q2. The US, Europe, Australia and Chile have all taken steps to challenge China’s reign — a tough goal and a long journey given current market dynamics.

For Benchmark Mineral Intelligence Head of Price Assessments Andrew Miller, the question of how to manage supply chains in the most effective way is going to be a continuing issue over the next decade, but investment in the sector remains crucial. 

“Money is just not going into the market at the speed it needs to allow producers outside of Asia to challenge the dominance in particular of Chinese producers at the moment,” Miller added.

Unsurprisingly, the downtrend in prices continued to be a main topic of discussion in the space during the second quarter, with many still wondering whether or not a rebound is on the horizon. 

“Are we at the bottom with respect to lithium? That’s really the name of the game right now,” Chris Berry of House Mountain Partners said. “The generalist investors believe in the electric vehicle theme, but until they get some clarity on when pricing levels out everyone is on the sidelines.”

The battery metals analyst still believes investors should keep an eye on prices from a directional perspective.

For Tianqi Lithium (SZSE:002466) President Vivian Wu, the lithium market is now on track to healthy sustainable growth as lithium prices stabilize after months of volatility.

“(Prices) will not go back to the crazy peak seen in the past few years … They will stay at a place where strong players like Tianqi grow, but will be challenging for a lot of new greenfield projects,” Wu said.

Similarly, Daniela Desormeaux, founder and CEO of signumBOX, said she sees today’s lower prices as a rebalancing of the market, and the current downward trend as a normal progression in the market, not something that is happening because fundamentals in the lithium market are no longer good. “We see this trend on prices like something normal, not something unusual.”

For lithium expert Joe Lowry of Global Lithium, all the worry investors have over lithium pricing is misplaced.

“What investors need to be concerned about is if the companies they own shares in will produce a vast majority of battery quality product,” he recently wrote in a post.

Almost at the end of the quarter, another big news item hit the lithium space — the announcement that the London Metal Exchange (LME) had decided to join forces with price reporting agency Fastmarkets to develop a lithium futures contract. The move is expected to bring more transparency to lithium prices, which have been under pressure in the past several months.

However, producers were quick to state that they are hesitant about this move, with top producer Albemarle rejecting to provide price information or contribute to the contract.

Reactions from industry experts after the LME’s announcement have been mixed, but most agree that the 142 year old exchange has a number of key challenges ahead.

“The industry has an evolution to go through before the introduction of a financial derivative can be useful to the market,” said Benchmark’s Miller. “We are still operating in an industry where there’s long-term contracts, there’s no formal spot market for lithium at the moment and there’s no accepted industry price.”

Miller added that the way to bring price transparency is through independent price collection. “A contract has the potential to bring transparency, but only if there’s liquidity on the contract — that is crucial.”

Benchmark Mineral Intelligence was also in the running to partner with the LME on the contract.

Lithium market update: What’s ahead?

As the second half of the year begins, there are key factors that investors interested in lithium should keep an eye out for. 

One trend Miller will be watching closely during the next six months is the growth of some of the cathode technologies — in particular LFP (lithium-ironphosphate), for which lots of Chinese producers have existing infrastructure and lower cost of production.

“Some of the reduction in EV subsidies is promoting lower cost cathode production as well, so in the short term I think it is an interesting trend in the market,” he added. 

He will also be looking at how that affects the supply and demand balance in the space. 

“Because really, when you look at the new capacities being introduced in the market in the second half of the year, the vast majority are targeting hydroxide,” Miller said. “So what does it mean for the carbonate market — does that tighten up a bit? And are we going to have a bit more hydroxide in the supply chain than what is needed at this point?” 

Berry said that in the meantime most market participants will still focus on prices, but he is hoping to see more deals like the Wesfarmers-Kidman one or involving companies like Wesfarmers.

“I like calling that money, ‘money with a long view’ — it’s money that is very patient,” he said. 

“This is not a market where you make an investment today and your stock picks are going to be up 800 percent next year,” Berry added. “I think that those sort of above average returns are going to take 3 to 5 years and so investors want to be really thinking that way.” 

For his part, Lowry said 2019 is a fantastic year to be acquiring stocks of high quality lithium assets.

“For me, as an investor, this is the best of times, not the worst of times, because I have a longer runway to acquire shares that are undervalued,” he added.

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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