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What happened to lithium in Q1 2022? Our lithium market update outlines key developments and explores what could happen moving forward.

Click here to read the previous lithium market update.

Lithium kicked off 2022 on a high note, with prices rising after increasing more than 400 percent last year. Questions about supply continue, and demand is expected to soar in the coming decades.

But how did lithium perform in the first quarter of 2022, and what’s ahead for the metal in the near term?

Read on for an overview of the main news that impacted the lithium market in Q1, plus a look at what investors should watch out for the rest of the year.

Lithium market update: Price performance

Last year saw lithium prices climb on the back of strong demand from the electric vehicle (EV) industry, and as mentioned analysts are optimistic about the market going forward.

So far in 2022, prices have increased more than 126 percent, according to Benchmark Mineral Intelligence data.

“Following the price rally in the Chinese domestic market in Q4 2021, there was an expectation that lithium prices would continue to climb in early Q1 on the back of reports that the market remained exceptionally tight,” Benchmark Mineral Intelligence Senior Analyst Daisy Jennings-Gray told the Investing News Network (INN).

“However, as per every significant price milestone lithium has hit in the last year, each month brought fresh highs that many didn't think would be achieved so quickly,” she said.

The EV industry is the main lithium demand driver, propelled by global clean energy goals. Global electric car sales totaled 4.2 million units in 2021 — up by 108 percent versus 2020 and by 198 percent versus 2019, according to JATO data — and there are no signs of a slowdown in 2022.

Motivated by high lithium prices and the desire to meet the surging demand, companies shared news about ramp-ups, restarts and expansion plans during the first three months of the year.

“But the quarter definitely painted a clear picture of the disconnect between lithium supply and downstream demand from the EV industry,” Jennings-Gray added.

Another trend seen in Q1 came with the update in contracts pricing outside of China — this happened as the reality of rising lithium prices hit international buyers.

“As we'd expected, many of the longer-term, fixed-price contracts that buyers had enjoyed in the years previous were replaced with contracts containing quarterly, or even monthly, pricing renegotiation breaks,'' Jennings-Gray said. “Meaning the levels in the Chinese spot market have begun to have a much more closely linked impact on international prices, cementing China's role as the bellwether for lithium pricing.”

Global markets experienced volatility during the first quarter on the back of the Russia/Ukraine war, but its impact on the lithium supply chain has been limited.

“There are no lithium mining operations in Russia or Ukraine, although Russia produces lithium hydroxide from imported lithium feedstock,” S&P Global Market Intelligence Senior Analyst Alice Yu said in a March note. “The current lithium market tightness means that, given time, the supply chain could reroute the materials otherwise processed and exported from Russia.”

Russia exported 7,503 metric tonnes (MT) of lithium carbonate equivalent (LCE) in 2021 — 1.5 percent of annual global chemicals supply — primarily to South Korea and Belgium.

Lithium market update: Supply and demand

At the end of 2021, most analysts agreed that demand would outpace supply in 2022, and were forecasting a deficit ahead. Even though a supply response is expected from the market, which could alleviate the current tightness, demand for lithium is still expected to be higher as EV sales continue to increase in key markets.

Benchmark Mineral Intelligence’s latest lithium forecast calls for a deficit of around 80,000 MT of LCE in 2022, which is an upwards revision of the anticipated deficit since the firm's last forecast.

“This is largely on the back of an upwards revision of downstream demand for the year to nearly 700,000 MT of LCE, given how quickly cell and cathode projects, particularly in China, are developing,” Jennings-Gray said.

In China, demand for lithium carbonate remains dominant on the back of a trend towards lithium-iron-phosphate (LFP) cathode production, as opposed to nickel-cobalt-manganese (NCM).

“This trend is the main cause behind the pricing gap that opened up between carbonate and hydroxide in late 2021. However, many Chinese converters moved towards the atypical conversion of hydroxide into carbonate as the significant pricing disparity made this economic,” Jennings-Gray said. “As such, increased demand for hydroxide to convert into carbonate has begun to close the price gap between the chemicals in recent months.”

Outside of China, she added, hydroxide remains the preferred feedstock for many battery end users. With a structurally smaller market, that makes supply tightness particularly prevalent.

“In terms of pricing internationally, carbonate and hydroxide have largely come to parity with one another, indicating that demand is unprecedented for either material,” Jennings-Gray said.

That said, it is important to note that the hydroxide market has always been less liquid than carbonate.

“Hydroxide supply is typically agreed within negotiated contracts with highly specialized cathode and battery producers,” CRU Group’s Martin Jackson explained. “For this reason, it's typical to see carbonate prices overtake hydroxide during high-demand periods.”

Lithium demand is expected to perform well overall in 2022, but what will happen in the short term?

“The rate of demand growth is expected to wane until the end of the summer, when cathode producers typically have a renegotiation period,” Jackson told INN.

In terms of supply, the market has seen expansion and restart announcements from major producers in the first quarter of the year on the back of the price rally. “For now, the market remains short, but stated ambitions from miners indicate that a surplus could form in the latter half of 2022,” Jackson said.

Meanwhile, Jennings-Gray pointed out that while some lithium assets have been accelerated, potentially bringing extra supply to market in 2022, the project pipeline still faces delays, which underpins the widening deficit.

Going forward, based on current project announcements, Benchmark Mineral Intelligence expects this deficit to widen over the next couple of years as demand continues to outstrip supply. “However, a number of disruptors, such as novel technology breakthroughs, could ease this imbalance,” Jennings-Gray noted.

Lithium market update: What’s ahead for prices and key catalysts to watch

When asked about what he expects to see in the second quarter in terms of lithium prices, Jackson said they have already peaked and settled.

“The market is far beyond fundamentals, driven by disappointing supply in Q4 and Q1 and surging vehicle sales in China,” he told INN. “We foresee a large correction in both carbonate and hydroxide prices towards the third quarter — but demand is typically strongest in the last quarter.”

Since March, lithium carbonate prices have been stabilizing in the Chinese domestic market.

“Typically, into the spring months and across summer, production from the brine projects in Qinghai province ramps up as the weather gets warmer and evaporation rates become more favorable,” Jennings-Gray said. “While this will happen as usual this year, it is likely that all of this supply will be absorbed domestically, and even then we still expect the Chinese market will be left in deficit.”

The market may continue to see a leveling off of pricing, rather than a constant upward climb, particularly over the summer months. “However, it seems unlikely that prices will fall by any significant amount this year, given the anticipated market balance,” Jennings-Gray said. “Demand for both hydroxide and carbonate remains high, so pricing downside drivers are very limited.”

As the second quarter of the year unfolds, there are some key factors lithium investors should watch for.

All eyes will be on the upcoming ramp-up and expansion projects expected this year.

“A handful of Australian and Chilean ramp-ups remain the biggest risk to our forecast,” CRU’s Jackson said. “There is enough incentive for these to exceed expectations and maximize returns.”

Similarly, Benchmark Mineral Intelligence’s Jennings-Gray said the success of these expansion and restart projects will play a part in the reality of how tight the market is by the middle of 2022. “Furthermore, the effect on the spodumene feedstock bottleneck and the price for which any available spodumene material goes for on the spot market will be a defining factor in showcasing market sentiment,” she said.

The senior analyst added that the ongoing development of contracting structures, and how much Q2 price revisions impact the cost of materials, particularly internationally, will be something to keep an eye on.

“These will be the prices that start to be felt by the end user, and may mean that we start to see the realities of the rising cost of lithium passed down the supply chain outside of China,” she said.

Don’t forget to follow us @INN_Resource for real-time news updates!

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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