What happened to lithium in Q3 2020? Our lithium market update outlines key developments and explores what could happen moving forward.
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The coronavirus pandemic has changed the outlook for most commodities, with lithium being no exception.
Despite the volatility that the spread of the virus has added to an already challenged market, most analysts believe lithium demand is still poised to surge in the long term on the back of the probably delayed but not denied energy revolution.
Q3 added Tesla’s (NASDAQ:TSLA) Battery Day announcements to the mix, putting the lithium-ion battery supply chain under the spotlight, with lithium mining and processing receiving particular attention.
How did the metal perform in the third quarter of 2020, 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 Q3, plus a look at what investors should watch out for the rest of the year.
Lithium market update: Price performance
The first half of 2020 was full of uncertainty on the back of the coronavirus pandemic, with prices for lithium remaining at low levels.
COVID-19 had a serious impact on downstream demand, putting downward pressure on pricing. That factor was compounded by the sustained oversupply of lithium in the market, George Miller of Benchmark Mineral Intelligence told the Investing News Network (INN).
“This trend followed from Q2 2020 through to Q3, largely as expected, and continued to exert similar downward pressure on prices,” he said.
The Benchmark Global Weighted Average Lithium Carbonate Price fell 7.1 percent in Q3, close to its 7.4 percent drop the quarter before. The equivalent Benchmark Lithium Hydroxide Price was stable across Q3; a more limited supply structure meant market pricing was more resilient to downward pressure.
“This was consistent with its performance earlier in the year, where the original impact of COVID-19 on prices had been more limited relative to carbonate — recording a 5.5 percent fall in Q2 2020,” Miller said.
Similarly, Jake Fraser of Roskill said that during Q3, from a holistic perspective, both spot and contract prices continued to behave according to the expected declining trend throughout 2020.
“That being said, domestically within China there has been evidence of prices firming in recent months compared to that of Q1,” he said. “This has resulted from a rise in customer enquiries for product in future periods, largely from the battery sector. This could be an early indication of behaviors being redirected from being inventory conscious to buying in advance.”
However, Roskill doesn’t anticipate a material rise in spot pricing in China until the second half of 2021 or first half of 2022, owing to significant stocks overweighting the market.
Lithium market update: Tesla’s battery day
Despite being just one part of the electric vehicle (EV) story, all eyes were on Tesla at the end of September, as the lithium-ion battery took center stage during the long-awaited Battery Day.
Sourcing lithium from clay, building a cathode plant and expanding its battery cell capacity to 3 TWh by 2030 were just a few of the announcements Tesla made as it outlined plans to achieve its main goal — producing an affordable US$25,000 EV in the next three years.
Speaking with INN, Daniel Jimenez of iLi Markets said his takeaway from the event was that price parity between internal combustion engine vehicles and EVs is going to come at an accelerated speed.
“The efforts Tesla is making in reducing costs of batteries and of the vehicle itself … will make the decision to buy an electric car over an internal combustion engine easier,” he told INN after the event.
Talking on Battery Day about sourcing lithium specifically, Musk said Tesla has acquired the rights to lithium-rich clay deposits in Nevada, and said the company has found a way to mine it in a sustainable and simple way — using table salt and water.
“Tesla’s plans to mine its own lithium from clay using only water and table salt … struck me as overly simplistic and given that Lithium Americas (TSX:LAC,NYSE:LAC), in particular, has spent years cracking the code on high-purity lithium from clay, Tesla’s announcement here was hard to take seriously without much more detailed information,” Chris Berry of House Mountain Partners said.
For the expert, Tesla won’t realistically be mining its own lithium until several years from now.
Speaking with INN after the event, Benchmark Product Director Andrew Miller said one of the more credible announcements Tesla made was its involvement in refining, giving the company some control over its input chemicals.
“If you’re refining those chemicals yourself, presumably you can meet your exact specifications rather than relying on a group of other companies that are also trying to refine for a number of other converter consumers out there,” he said. “It also gives them the ability to perhaps source from various different areas for its raw materials.”
That said, Miller doesn’t expect to see Tesla converting its own lithium before 2023 to 2024.
Lithium market update: What’s ahead for prices
Looking at what’s ahead in the fourth quarter for prices, Roskill expects them to remain relatively in line with current levels, albeit with some variation taking place within sub-markets.
“Supply of high-quality lithium hydroxide to tier one cell makers in Japan and South Korea will continue to show strength over the domestic China market, with product still being sold at between US$8,000 to US$10,000 per tonne,” Fraser said.
Within China, Roskill expects the domestic spot price to track sideways for the most part, having bottomed out below most market participants’ marginal cost.
“Increasing enquiries for spot product may underpin this by having a shoring up effect,” Fraser added.
Speaking on what’s ahead for prices, Benchmark’s Miller said he has seen some stability and resilience begin to creep into the Chinese domestic market, where pricing has come very close to producers’ costs and doesn’t have much room to go lower.
“We expect increasing stability in pricing as the market begins to come into balance due to improving demand, signaled by Chinese domestic pricing, which tends to be a bellwether of lithium prices.”
At the moment, Benchmark is seeing prices continue to soften outside of China at a slower rate than H1 of this year or 2019, and expects these prices to also stabilize soon.
“That said, international prices (especially CIF NA and CIF Asia), will still exist at a premium to domestic Chinese pricing due to a higher proportion of battery-grade lithium chemicals in these markets, and a longer contract base,” Miller said.
For Roskill’s Fraser, price remains the key factor to watch, along with its reaction, if any, to the downstream sector’s ability to make any meaningful headway on built-up stocks.
“Alongside the spot market in China, contract prices ex-China continue to be an interesting development,” he said. “This comes as although prices have remained strong, owing to high-purity and predetermined contract pricing, there has been an overall declining trend.”
How much further this will travel is uncertain, as Roskill expects there to be greater support than what was experienced in China’s domestic market.
Lithium market update: Factors to watch
When asked about what’s ahead for the lithium market, Fraser said investors should continue to keep an eye on EV sales, which have been strong since July this year.
“In addition to this the types of EVs being sold, such as hybrids versus fully electric vehicles, larger battery packs sold in EVs have a greater impact on lithium demand,” he said. “Accounting for an approximate five month delay in the supply chain from OEM back to the lithium refinery, a strong end to 2020 in terms of EV sales could begin to strengthen lithium product demand come Q2 2021.”
In terms of factors to watch, Miller pointed to joint venture and partnership announcements throughout the lithium value chain, Q3 financial statements for major market players and EV sales in Europe.
Looking further ahead, Berry said the next 10 years in this sector “are going to be amazing” in the changes and opportunities they will present. In particular, he is looking very carefully at the technological side of this shift — specifically cathode and anode development.
“I don’t see a new revolutionary battery chemistry on the horizon, but do see changes and margin expansion achieved through optimization of battery components,” he added.
Jimenez said the fact of the matter is the market is in oversupply today, and it will probably take one year or more for that oversupply to be consumed.
“But after that, demand will be growing at a much higher pace, and additional capacity will be required for the industry as of 2024 — those investments need to be done today,” he said.
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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.