Lithium Market Update: Q1 2021 in Review

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The first few months of the year have been bright for the lithium market, with interest in battery metals increasing as electric vehicles (EVs) take over news headlines around the world.

Despite the volatility brought by the coronavirus pandemic to every market, lithium has shown resilience and prices performed on an uptrend during the first quarter.

What else happened to the metal in the first quarter of 2021, and what’s ahead for lithium in the near term? Read on for an overview of the main news that impacted the lithium market in Q1, plus a look at what investors should watch out for the rest of the year.

Lithium market update: Price performance

At the end of last year, the trend of declining lithium prices seemed to be coming to an end, with analysts predicting a better price environment ahead.

When the year kicked off, Benchmark Mineral Intelligence was already expecting the lithium market to come into tightness in 2021.

“But the speed of price increases in Q1 2021 was beyond expectation, with prices for lithium carbonate having nearly doubled in price since the beginning of the year,” George Miller told the Investing News Network (INN). “Furthermore, shortages and sold out order books in Q1 were a stark change from Q4 2020, where lithium chemicals were freely available to consumers at lower prices.”

Commenting on how prices performed in Q1, William Adams of Fastmarkets said he was expecting a bullish outcome on the back of strong demand and restocking.

“But the extent of the buying and suddenness of the emergence of tightness was a surprise,” he explained to INN. “It soon became apparent that a lot of the surplus that had built up in 2020 has been bought up and stockpiled by a few large users, and that the idle capacity was not ready to restart in a timely manner for various reasons.”

CRU Group also saw spot prices continue to move higher as expected through Q1.

“EV sales across the key regions in Q1 have actually exceeded our already bullish expectations,” James Jeary told INN. “On the supply side, there’s been plenty of development of projects in preparation for future supply growth, which is unsurprising.”

During the first three months of the year, leading producers released positive projections for the sector. Top Chinese producer Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460), which saw its profits almost triple last year, said it expects the slower growth in lithium supply to extend the recent rally in prices.

Meanwhile, Chile’s SQM (NYSE:SQM) sees demand growth reaching 25 percent this year. The miner posted record lithium sales in the last quarter of 2020, jumping 50 percent from the previous quarter.

For its part, rival Albemarle (NYSE:ALB) estimates that lithium demand will grow in line with greater EV adoption, with the company accelerating its lithium growth projects to capitalize on this trend.

Lithium market update: Supply and demand

EV sales surged in 2020, and remained remarkably strong in China and Europe in Q1.

“In Europe, this is partly due to the year-on-year effect of subsidies, which were introduced at the beginning of H2 2020,” Jeary said. “Although sales may dip quarter-on-quarter in China in Q2, we do still expect year-on-year to be strong.”

Similarly, Adams pointed to China’s EV sales — where first quarter sales totaled 515,000 EVs.

“European sales have also been strong, and with US President Joe Biden now at the helm we expect the three largest EV markets, China, Europe and the US, to drive EV adoption, whereas in recent years it has really only been China, with Europe only really picking up strong momentum in 2020,” he said.

As a result, Fastmarkets is expecting demand for lithium-ion batteries to continue to pick up pace.

“If EV production is slowed due to semiconductor shortages, we expect battery factories will continue to increase production so they build up inventory,” Adams added.

Another trend seen in the quarter has been the continued discussion around the use of lithium-iron–phosphate (LFP) cathodes, which are cobalt and nickel free.

CRU has seen strong LFP demand in the Chinese EV market, which according to Jeary is underpinning lithium carbonate demand.

“There is very strong demand for cheaper, low-range EVs in China, which typically use LFP — this is likely to continue through 2021,” he said.

Higher Chinese LFP demand, paired with hydroxide production capacity increases, has driven carbonate prices up, with Fastmarkets expecting carbonate prices in China to remain at a premium to hydroxide.

“Outside of China, hydroxide is still trading at a small premium to carbonate, and we expect that to remain the case for now,” Adams said.

Similarly, Benchmark Mineral Intelligence also saw a higher focus on lithium carbonate in Q1 as a result of strong sales of LFP and lower-nickel cathode-based EVs, with demand focused around China.

“We have begun to see increasing demand for lithium hydroxide in recent weeks, as in a reverse of fortunes it has become the cheaper feedstock due to carbonate tightness,” Miller said. “As such, we are expecting demand for hydroxide to pick up pace in Q2, as the market adjusts to supply-side tightness with little forecasted relief in the near-term future.”

Looking over to supply, expansion decisions are likely to happen this year in preparation for increasing brownfield mine supply, CRU’s Jeary said.

“Restarts will also be considered, but there is more flexibility for these over implementing expansion plans,” he added.

Miller said it is important to keep in mind that many of the expansions happening now are those that were canceled or delayed over the past few years.

“So it is really bringing these back on track,” he said. “Even so, we will need to see further announcements if the looming deficit is to be pushed out further.”

Looking at overall supply and demand dynamics forecast for 2021, CRU expects the lithium market to be in deficit in 2021. Meanwhile, Fastmarkets’ Adams thinks that on paper the market will be in a surplus.

“But given (that) the ever-expanding downstream capacity will need more working stock, the market is likely to feel balanced, and there are likely to be further bouts of tightness as we witnessed in Q1.”

For its part, Benchmark Mineral Intelligence is expecting to see the market marginally undersupplied in 2021. “It’s really from next year that supply issues become more significant,” Miller said. “As such, we are expecting the current market tightness to continue and thus upward price pressure.”

Lithium market update: What’s ahead for prices and key catalysts to watch

As Q2 is already in full swing, many investors may be wondering what’s ahead for the lithium space.

“Chinese EV sales are expected to slow slightly in Q2 (compared to Q1), which may slow the rise of spot prices,” Jeary said. “However, the recent spot price gains will continue to filter through into longer-term contract prices.”

When looking at what’s ahead for prices in Q2, Adams said restocking has run its course now.

“That should mean those consumers who have restocked are able to avoid chasing prices higher for awhile,” he said. “But there are convertors/processors in China who have not had enough feed material to ramp up production, so they will be keen to buy. This is likely to provide support to prices.”

However, he added, with some of the larger Chinese brine producers back in production after the winter months, availability in China should pick up.

“As such, we expect prices to consolidate in the second quarter around the levels they were at the end of March,” Adams said.

Given the continued growth in downstream demand for EVs and cells, Benchmark Mineral Intelligence is also expecting upward pressure on pricing to be maintained during 2021.

“Currently, the level of pricing for lithium chemicals is sustainable, but continued higher prices are required to incentivize the new supply that will be needed to meet growing demand,” Miller said.

Benchmark’s domestic Chinese battery-grade lithium carbonate price was assessed at the end of March at an average of US$12,850 per tonne (EXW China), while its equivalent hydroxide price remained at US$10,325 per tonne. Previously, from 2018 to 2020, hydroxide maintained a US$1,000 to US$1,500 premium over carbonate.

“As demand for higher-nickel cathode chemistries improve, which offer higher energy density and longer-range travel, yet are produced by few cathode manufacturers at current, we expect hydroxide prices to catch up to and exceed carbonate, returning to the status quo,” Miller said.

When asked about factors investors should watch in the second quarter, Jeary said government subsidies and OEM pledges will be important in determining EV uptake.

“Any announcements related to mine expansions or restarts will also be important for determining supply over the next few years,” he said.

For Fastmarkets’ Adams, having invested enormous amounts in downstream capacity, the market needs more investment in upstream capacity. “So I would be on the lookout for more announcements on that.”

Points investors should keep an eye out for in the second quarter, according to Miller, include announcements of government policy regarding domestic supply chains and EV sales.

In addition, integration and partnerships in the lithium-ion battery supply chain and investment into supply expansions from lithium producers could also be catalysts for the market.

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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.