Lithium Prices Unlikely to Fall Lower, but Watch Out for Upcoming Contracts

Battery Metals

George Heppel of CRU Group believes prices are unlikely to fall further in spite of anticipated lower demand — but there is a strong chance that contract prices will be negotiated down in the coming months.

The coronavirus has increased volatility and put pressure on commodities, but lithium prices have remained largely unchanged, CRU Group’s George Heppel told the Investing News Network.

“In fact, we saw hydroxide prices in Asia rise in a few cases in Q1 due to logistics issues caused by the pandemic,” said Heppel, who is a senior analyst at the firm.

According to CRU Group, Chinese carbonate spot prices are currently trading in the range of 44 to 48 RMB per kilogram of lithium carbonate equivalent (around US$6.20 to US$6.80).

“We believe (prices) are unlikely to fall lower than this in spite of anticipated lower demand,” he said. “However, there is a strong chance that contract prices will be negotiated down in the coming months.”

Speaking about the impact of the virus on electric vehicle adoption, Heppel said COVID-19 is a disaster for the automotive sector.

Looking to 2020 as a whole, CRU Group currently expects a 20 percent year-on-year drop in automotive sales worldwide — but on a regional basis it could be much higher, in Europe in particular.

“This is going to hit OEMs hard,” he said. “Some OEMs (most notably Volkswagen Group (OTC Pink:VLKAF,FWB:VOW)) have already invested so much in batttery electric vehicles (BEVs) that they are unlikely to alter their plans, but I wouldn’t be surprised if we begin to see some OEMs which haven’t yet properly pulled the trigger on BEVs yet focusing more on hybrid electric vehicle production for the next couple of years.”

Heppel added that this would allow them to still abide by the European Union’s 2020 emissions laws while not requiring the same level of capital deployment needed for the BEV transition.

“The shift to e-mobility remains inevitable in the long term, but in the short term OEMs need to consider their balance sheets,” he said.

Looking back at the first quarter of the year and the impact of the coronavirus outbreak on lithium demand, Heppel said that even if one expects economies to begin to reopen in Q2, the overarching negative effect on demand caused by the looming recession is going to put a limit on end-user demand.

“Demand will certainly rebound in Q2, but cell manufacturer order books are going to be significantly lower than they were before COVID-19,” he said. “Considering we estimate that there is around 5.5 months of stock in the lithium supply chain at present, this suggests that the market will be well-supplied for the foreseeable future unless there is a significant change in our supply view.”

CRU Group, which is still revising its lithium outlook for 2020 to 2021, expects Chinese spot prices will likely continue to trade along the bottom during Q2.

“Contract prices are likely to be renegotiated down at some point, but due to the long-term contractual nature of lithium supply, this may not happen immediately,” he said.

The coronavirus has led miners to temporarily stop operations in some countries and, most impactful for the sector, revise future spending and expansion plans.

For Heppel, even though another investment cycle, similar to what the market witnessed in 2016 to 2018, will inevitably need to be made in the lithium market, this does not necessarily mean that prices will return to 2016 to 2017 levels.

“During that time, the vast majority of new supply entering the market was from greenfield projects which inherently necessitated a much higher price stimulus,” he explained. “The next bump in supply will most likely begin in 2021 to 2022 and will come from a variety of sources — mines reopening, better capacity utilization, brownfield expansion, and so on — which will require a price increase to be incentivized, but will not require anywhere near the sky-high prices seen in 2016 to 2018.”

Looking ahead, Heppel said he will be watching carefully to see how governments intend to support their domestic automotive industries in a post-COVID-19 world.

“China has already announced ambitious plans to support their automotive sector, and it remains to be seen whether the US and Europe act in a similar manner,” he said.

Another crucial factor investors should look for is a possible “second wave” of COVID-19 in China.

“Many people continue to assume that economies will reopen and return to normal in the next few months, barring a temporary loss in output,” he said. “If China is unable to contain a second wave of COVID-19, then it will become clear that the impacts of COVID-19 are much larger and more far-reaching than we are currently expecting.”

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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.

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