Q2 to Bring Lithium Demand Recovery, but Not Better Prices

The global coronavirus pandemic could delay the adoption of electric vehicles (EVs), as well as OEMs’ schedules — but the EV story is only heading one way, William Adams of Fastmarkets said.

“Having seen the benefits of greatly reduced pollution in cities around the world as economic activity has stalled, we expect local governments will be even keener to encourage the rollout of EVs over internal combustion engines,” he told the Investing News Network.

Adams expects a pickup in EV sales in China in the second quarter, which should see demand rebound; however, weakness will continue in Europe and the US in the first half of the second quarter, with a potential recovery expected later in the period.

During Q1, the COVID-19 outbreak dominated market dynamics, but interestingly lithium has been one of the metals least affected by the pandemic in terms of price, Adams said.

Fastmarkets’ lithium carbonate battery-grade prices, ex-works China, were recently trading at around 45,000 yuan per kilogram, down from 48,000 yuan in mid-January. That’s a drop of 6.25 percent, but a less significant fall than what other commodities, such as base metals, saw in Q1.

However, in the first three months of the year, weak demand, low prices and squeezed margins combined to put pressure on companies operating in the sector, and for most juniors, the headwinds will make attracting investment money that much harder, Adams said.

Speaking about how the outbreak has changed his outlook for lithium this year, Adams said that while there have been some supply disruptions caused by government intervention to help reduce the spread of the virus, he does not see any shortage of lithium this year or next, given the oversupply situation and the abundant levels of stock along the supply chain.

“With some supply restraint, some production cuts due to quarantines and with shipment delays, supply reaching the market will be lower this year than in 2019,” he said.“We expect shipments will be able to pick up in the second quarter, but shipments will be made in line with demand.”

For Adams, lithium demand will likely prove poor in Q1, but he thinks actual demand may not have been as bad as apparent demand. That’s because he expects consumers will have been destocking into the uncertainty. “We expect demand will start to recover later in Q2 and more so in the second half,” he said.

However, the analyst forecasts that production will rebound and get back on track at a much faster pace than demand will recover.

“But we would not be surprised to see this low price environment lead to more producer restraint, with further production cuts and more strategic stockpiling by producers,” he said.

Adams added that these cutbacks are likely to help rebalance the lithium market, which should help lift prices marginally — although prices are likely to remain capped as there’s idle capacity that could be brought online into a price rise.

“Given stocks along the lithium supply chain and the ability for Chinese lithium brine producers to lift supply to meet a pickup in domestic demand, we do not expect any price improvement in Q2,” he said.

In fact, Fastmarkets expects average prices in Q2 to be lower by around 5.6 percent compared to Q1. Prices are expected to drift higher in the last two quarters of the year, with Q4 prices to be about 8 percent higher than they averaged in the first three months of the year.

Looking at the long-term impact of the coronavirus outbreak on the lithium space, Adams said COVID-19 has already and will continue to delay expansions and new projects, which will bring forward the time when the supply/demand balance swings into a supply deficit.

“This weak environment will also delay investment in processing capacity, especially in jurisdictions outside of China, which could further reduce the availability of the high-quality materials that the expanding tier one OEMs/battery manufacturers will require — this is especially so for lithium hydroxide,” he added.

For investors watching the lithium space, Adams suggested keeping an eye on the recovery in demand for EVs, as well as general industrial activity. It will also be important to watch whether governments introduce targeted incentive packages to support EV uptake.

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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.