Spodumene concentrate prices are already teetering at levels that are unsustainable for most incumbent producers, said Roskill’s Jake Fraser.
COVID-19 has increased volatility and uncertainty for most commodities, and for Jake Fraser of Roskill it’s safe to say the lithium market has already felt profound impacts due to the outbreak.
He told the Investing News Network (INN) that Roskill estimates approximately US$160 million of production value was lost in Q1 at the mine level on a lithium carbonate equivalent basis; the fall came on the back of either complete shutdowns or production scalebacks.
And the rest of the year is not looking any better, according to the firm, with similar losses of value expected to happen again throughout Q2, Q3 and into Q4 — which could collectively sum to between US$400 million and US$650 million of lost value.
“Granted, the high level of uncertainty around the potential of global economic recovery and effectiveness of planned stimulus will dictate what does eventually play out,” Fraser said.
For the battery metals analyst, given this is a very much a demand-side narrative of short-term uncertainty, “expectations for lithium supply growth, whether it be from new refineries or existing plants utilizing latent capacity, naturally must be tempered.”
The priority will be eating through stocks built up over fresh supply.
“And purchasing schedules from cell makers are likely to change to lower quantities if cell demand falls,” he said. “As if it wasn’t already the case, production cost management and procuring sales for established producers will be crucial.”
But the performance of lithium miners for the rest of 2020 will be determined by the COVID-19 situation globally, according to Fraser.
“Demand for lithium fundamentally remains an electric vehicle (EV) story, and retracting economies may stifle disposable incomes that were initially intended for an EV purchase,” he said. “This inherently tracks back through the battery supply chain from the cell maker to the miner, reducing the need for higher levels of production.”
Looking at how the coronavirus will impact that EV story, Fraser said COVID-19 is forecast to have significant short-, medium- and long-term impacts.
Prior to the virus outbreak, Roskill’s 2020 base case forecast was for a 60 percent year-on-year increase in EV sales to 2019, from 2 million to around 3.2 million EVs in 2020.
“We are now assessing the demand impact on the automotive sector as a function of lockdown durations, under one month through to six month lockdown scenarios,” he explained to INN. “As a result, we now forecast EV sales to be between 30 and 45 percent lower than (previously expected), with sales of approximately 1.8 million EVs under the worst case six month lockdown scenario.”
For Fraser, in the current market, a point of interest for both miners and refiners will now be their ability to service debt, with prices highly unlikely to see a return to buoyancy over the next 12 months.
Looking over to what he expects to see in the second quarter of the year, Fraser said pricing across the board is forecast to remain soft.
Spodumene concentrate prices are already teetering at levels unable to sustain most incumbent producers in the low US$500s per tonne, while the domestic battery-grade carbonate price in China has declined further in recent months to between US$6,000 and US$6,500 per tonne.
“For both, more pain is expected for respective producers over the course of 2020 in order to sustain sales to buyers reluctant to purchase above these levels,” he said.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
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