2016 was a big year for the lithium sector. Here’s what analysts have to say about the lithium overview for 2016.
Ever since Tesla Motors'(NASDAQ:TSLA) said that it would be building a lithium-ion battery gigafactory, the lithium sector has no doubt been impacted by the announcement.
In that regard, 2016 proved to be an exciting year for the lithium sector–perhaps its biggest one in recent years–in terms of demand and price.
Analysts have previously commented that lithium demand would grow to about 182,000 metric tons in 2016–and is expected to only go higher from there. Still, while Tesla plays a huge role in terms of the mineral’s demand, as Joe Lowry of Global Lithium pointed out, “Tesla is a story, it’s not the story.”
Looking over to the soaring lithium price throughout the year, some analysts have been shocked by its significant increase. Going forward, however, keeping an eye on how prices develop in China will be of interest.
To that end, the Investing News Network (INN) reached out to Lowry, as well as Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal and Andrew Miller of Benchmark Mineral Intelligence, to get a lithium overview of 2016. Here’s what they had to say.
INN: What are your thoughts on the lithium market in 2016?
JL: The market developed pretty much as I anticipated with supply continuing to be short, prices in China remaining high within a fairly narrow price ban, and the price outside of China moving up substantially. SQM (NYSE:SQM)–as the leader in lithium carbonate supply to the battery industry–best represents what is happening to price outside China. Their recently reported Q3 2016 lithium carbonate supply price was approximately $12/kg. It is obvious with each passing quarter that there is a new normal for lithium carbonate pricing outside China. SQM’s lithium business is focused on upstream lithium chemicals, primarily lithium carbonate so they are the best indicator of pricing outside of China.
AM: Well we certainly thought it was going to be some tightness in the market, and perhaps not a huge surge in prices that we saw. It’s certainly led the way in how the industry’s been shaping up in terms of bringing supply to the market and the demands that we could see certainly from the battery sector.
Lithium has been the first of these battery raw materials to see a real price surge. This is just from incrementing increases in batteries so the industry has a long way to go to meet the future demand.
CB: The surprising price strength really stood out. The question now we ought to be asking is “what is the “new normal” for lithium chemicals pricing?” Factoring in the spot market prices in China as well as current contract prices when they are renegotiated will be a key metric to watch, though not the most important going forward.
It would appear that auto makers are now serious about electrifying some–or all–of their fleet in the next few years, which will be supportive of lithium pricing. While I do believe in mean reversion, it seems entirely likely that lithium prices will normalize at a higher level than in years past – perhaps $10,000/t for battery grade material. As the cost of a battery continues to fall and energy density increases, this in a sense re-writes how energy will be generated, stored, and utilized going forward. The regulatory framework is also a tailwind as subsidy regimes and broader stimulus like the Paris agreement will help the overall business grow.
Despite the positives here, it’s important to remember that mean reversion is a very real and repeatable phenomenon.
INN: Were your predictions for 2016 correct?
JL: I think my price projections were very close to reality. I was also correct that new supply would be slow to come to market.
AB: Yes, definitely. We saw that there were going to be issues as with a lot of these critical minerals, the same as cobalt like we’ve just been discussing. With all of these critical minerals and metals, you see a very rigid supply structure and some big developments on the demand side. That’s certainly hinted to us that there was going to be some disruption in the market in 2017.
CB: Yes and no. I thought prices would start to move, but not quite as quickly as they have. This provided a tailwind for juniors. In June, I stated that the move higher in lithium junior miner share prices was over and based on share price returns, this has proven to be correct (though the call was a little early).
The value creation in lithium mining has moved from discovery to execution. This means that the investible universe of lithium plays is dramatically smaller than what currently exists.
INN: Were there any surprises that affected lithium that the market was not expecting?
JL: After many years of false starts, I think the rate of growth in battery was a surprise to many. If you look at the supply, demand and price projections of a company like Macquarie you can see that big names still have a hard time getting the lithium story correct.
AB: It was a lack in raw material expansion really that had the biggest impact. It certainly increase demand, particularly inside China. Unlike many of these things, China doesn’t have its own domestic resources. It relies on imports. Consumers need much more material and–in essence–the supply, either from Australia and brine resources in South America, which weren’t able to expand at the regular industry meeting.
CB: The rapid price increases were really the story of 2016. Also, Donald Trump’s victory in the US presidential election took many by surprise though it remains to be seen how this affects the whole clean energy ecosystem
INN: What do you think was the biggest news in the lithium market?
JL: In 2016, the “new normal” in pricing was definitely the big story especially when the CEO of the world’s largest lithium company talked about rapidly rising prices as an aberration. Given I was personally selling lithium hydroxide at over $25/kg to customers Albemarle (NYSE:ALB)and FMC (NYSE:FMC) couldn’t supply, it was clear to me that the market was not “in balance”. It took SQM’s more transparent reporting of prices quarter over quarter in 2016 to validate what I was saying.
AM: Looking at the lithium sector as a whole, it was good to see what we’ve been saying about these materials for a number of years now and the issues that the markets are going to have to resolve. We’ve seen some of what that can lead to this year. It’s opened a lot more people’s eyes to the issues in the battery supply chain that needs to be overcome if the industry wants to expand. I think it will serve a lot to learn some lessons from what’s happened with this year.
CB: Chinese companies securing off takes from juniors and major lithium producers such as ALB, FMC, and SQM all announcing aggressive capacity expansions. This was driven by the clear need for a secure supply of material (on the part of the Chinese) as well as strong top line and EBITDA growth (on the part of the major producers). Based on recent statements by ALB management, it looks like they are trying to almost become a pure play lithium producer as the growth prospects in their other businesses pale in comparison to that of lithium.
For better or worse, Telsa’s announcement of the Model 3 and the large number of reservations as well as the merger of SolarCity (NASDAQ:SCTY) was also significant.
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Securities Disclosure: I, Jocelyn Aspa, 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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