Lithium Outlook 2020: The Lithium Decade Begins

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With electric vehicle (EV) sales and energy storage forecasts increasing at an unstoppable speed, many believe the 2020s will be the decade for lithium and other battery metals. 

Despite having a tough couple of years, with prices declining at a rapid pace, experts agree that lithium seems to have a bright future ahead.

Here the Investing News Network looks at lithium’s 2019 price performance, what analysts had to say about the market and what’s ahead for the metal in 2020.

Lithium trends 2019: Price decline overshadows strong demand forecasts

As many expected, China remained a main driver of the lithium story in 2019, with EV subsidy changes in the country impacting demand for battery metals across the board.

“Everyone is still focused on China and the fact that EV sales are slowing down,” Chris Berry of House Mountain Partners said. “There’s still year-over-year growth, but the fact that the rate of change in decline has accelerated somewhat is a bit concerning.”

Speaking about 2019, Benchmark Mineral Intelligence Managing Director Simon Moores pointed to what he calls the lithium-ion supply chain paradox.

“The price is down. It obviously gets people upset,” he said. “Prices in our lithium chemical index are down on average 12 percent, but demand is up 18 percent. What industries in the world have growth of 18 percent a year and you can walk around the industry and everyone is depressed?”

Lithium expert Joe Lowry of Global Lithium also mentioned the decline in prices, but he said he didn’t expect it to be a top story in 2019. “The story is (EV) growth, storage growth, and the product that supports that is not the one that sells for US$7,000 per tonne.”

William Adams, head of base metals and battery research at Fastmarkets, said that in 2019 the decline in spot prices in China led the way on the downside, with China, Japan and Korea following. He also mentioned the narrowing premium for lithium hydroxide over lithium carbonate.

“While we expected carbonate and hydroxide prices to reach near parity in 2020, we have been surprised just how fast the hydroxide premium has narrowed.”

Fastmarkets was also expecting that — due to likely large supply surpluses, cash flow issues and the difficulty of storing some lithium products — the upstream supply chain would adjust supply to avoid the buildup of large surpluses.

“We have seen production cuts and even some legacy producers say they will stockpile material, thereby adjusting supply to the market,” Adams said.

Roskill Consultant Jake Fraser agreed that the main trend has been the decline in prices, but said what’s more important is the regional disparity between China and ex-China pricing.

“(T)he latter (is) the weaker of the two, driven by a narrative of both raw material feedstock and refined lithium compound oversupply domestically.”

For CRU Group’s George Heppel, 2019 was characterized by two main trends. The first one was lower-than-expected demand, with China’s EV market slowing partially due to lower subsidies and an auto market slowdown, but mostly because it lacks the capacity to manufacture enough good-quality EVs.

The second main trend for the expert has been the conversion capacity ramp up in China.

“Many have been far too quick to dismiss China’s ability to ramp up battery-grade conversion capacity due to quality considerations — it’s a story we’ve seen play out time and again in the commodities and chemicals space,” he said. “Large quantities of cheap Australian spodumene have met ample conversion capacity in China. That is what has brought the price down.”

Prices performed as CRU Group expected in 2019 — the firm had been forecasting a price crash in 2019 since as early as late 2017, Heppel said.

Lithium outlook 2020: Market to rebalance ahead of exponential growth

Looking ahead, most experts agree that lithium prices are close to the bottom.

“I think we are at the bottom, or certainly close,” Berry said. “The question you want to ask yourself is not so much if we are at the bottom, but how long do we stay here?”

For the expert, prices will remain at this level until the excess spodumene that is flooding the market right now gets mopped up — he estimates that will take at least a year.

Lithium expert Lowry said prices at these levels are unsustainable.

“Whether we are at the absolute bottom or whether that comes in Q1, what I believe is that once we get to a bottom, it will stay there on the low end of the pricing until the excess inventory of spodumene and low-quality material are worked through,” he said.

He believes prices will start to rise in the next nine to 15 months, with a potential spike in 2021.

Similarly, Benchmark Mineral Intelligence Head of Price Assessment Andrew Miller said he is not expecting any major upticks or falls in lithium prices from where we are at the moment. “There will be a stabilization of prices going into the new year, (then) coming to the second half of 2020 you are going to see some improvements on pricing.”

Speaking about demand, Miller said he expects to see continued growth for lithium, with significant increases coming in 2021 to 2022. He anticipates gradual growth starting in the second half of 2020.

For Fastmarkets’ Adams, the production cutbacks and announcement that expansions will be delayed should start to rebalance the market more quickly.

“While we were not expecting a price recovery until late 2021 at the earliest, now that supply restraint has started to be seen we expect a price recovery later in the second half of 2020,” he said.

Meanwhile, Roskill’s Fraser expects the refined lithium market to remain in oversupply throughout 2020 and into 2021.

“On the demand front within China, EV subsidies are still expected to be wound down in 2020, although there remains potential for them to be extended as the dual credit system in its current form is not having a meaningful impact,” Fraser said.

He added that other core markets to watch are European EV demand, as recently Europe has overtaken China on year-to-date EV sales growth.

Similarly, Fastmarkets’ Adams expects to see strong growth in European EV sales as original equipment manufacturers (OEMs) make EV sales to meet CO2 commitments, and as the launch of additional models leads to more options.

In terms of pricing, Roskill expects battery-grade carbonate prices to remain under pressure, with further declines expected in the next three to six months. However, the firm expects a price floor to be reached within the next 12 months as some existing producers cannot sustain operations on a cost basis.

For its part, in 2020, Fastmarkets expects prices to be lower at first and then flatten out before a limited recovery in Q4. “But now, idle capacity and expansions will likely cap the upside,” Adams said.

CRU Group expects prices to remain below US$10 in both the spot and contract markets for the foreseeable future.

Lithium outlook 2020: Investments and partnerships

As 2020 begins, Lowry expects the lithium industry to experience “growing pains” for the next decade.

“For 40 years, lithium was a pretty sleepy business that had just a few players … it was not an industry that was prepared for an industrial revolution and that kind of growth,” he said.

“We are struggling to see how the demand is going to be there in battery quality by 2025, but the real question is if in the next three years there’s another million tonnes needed, where is that going to come from? Because we are not seeing the investment.”

Speaking about investment, Moores said he thought there would be more strategic decisions in 2019 from cathode makers, but he still expects that to pick up pace in 2020.

“Once you have that midstream investment … then the rest of the supply chain starts filling out and the miners can start to supply the actual industry. Until that point, China will continue to dominate,” he said.

Another factor to keep an eye on in 2020 is more mergers and acquisitions (M&A) in the space.

“We expect more cash-strapped producers will seek M&A opportunities,” Fastmarkets’ Adams said. “And juniors struggling to raise finance in this climate need to get outside help from other existing lithium producers or outsiders — such as some of the other global mega miners.”

Berry also expects to see more M&A activity, in particular because of the low lithium prices. “My forecast is increased M&A, but only for top-tier or close to top-tier assets,” he said.

Global Lithium’s Lowry said that entering 2020, he would like to see a big mining company, an oil company or an OEM, make a major investment.

“I don’t expect much more of the big guys — the Albemarle (NYSE:ALB), SQM (NYSE:SQM), Ganfeng (OTC Pink:GNENF,SZSE:002460), Tianqi (SZSE:002466) — acquiring small projects in the near term,” he added.

For CRU Group’s Heppel, the main driver of M&A activity in the lithium world is going to come from vertical integration as Chinese refineries increase stakes and guarantee offtake from the mining sector.

“Most of the value addition for lithium occurs at the refinery stage, meaning that Chinese refineries will be less concerned with immediate profitability from mining assets and will be more concerned with guaranteeing stable offtake for their ramp-up plans,” he said.

Lithium outlook 2020: All eyes on EV sales

For lithium-focused investors, watching EV sales is a must to see where and how the lithium market might move next.

“We are right on the crest of the wave, where a number of these major OEMs are going to be releasing more and more electrified car models, and so tracking the trajectory of those sales both inside and outside China is key,” Berry said.

In 2020, Fastmarkets also expects a recovery in new energy vehicle (NEV) sales in China.

“We think (the collapse in sales) will be temporary given there is more driving NEV sales in China than just subsidies — the government has targets,” Adams said.

Heppel also suggested that market watchers keep an eye on Chinese EV sales and particularly on the new subsidy policy expected to be announced early in 2020.

“The wider automotive market in general, which has suffered considerably this year, is also worth keeping an eye on too,” he said. “Most analysts are forecasting a bounce back in global auto sales, but this may not materialize if economic uncertainty continues to linger.”

Lithium outlook 2020: How to approach the new decade

As the new year begins, and given the current market conditions, many market participants are wondering how to approach this season.

“Whether we are in a bull or bear market, I don’t think your investment philosophy should change,” Berry said. “I think you should look for the top-tier assets, find those management teams that have experience in the space, both from a financial and technical side. It’s pretty simple.”

Moores said that the companies that will be the winners in the next decade will be the ones that are tied to the existing industry.

“Partners, joint ventures, whatever you need to do to get the experience from the people that (have the know-how),” he said. “Those partnerships are the make or break of any (company that) wants to supply the EV lithium-ion battery supply chain.”

Commenting on how to approach this season, Lowry said this is the time to put money in lithium stocks.

“There’s probably not going to be a good opportunity to get high-quality lithium assets as cheap as it is right now,” he said. “I think that if you are confident in your ability to analyze future winners, now is the time to put money in — if you believe in the theme, why would you wait?”

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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.