Lithium

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What happened to lithium in Q2 2022? Our lithium market update outlines key developments and explores what could happen moving forward.

Click here to read the latest lithium market update.

After rallying to all-time highs in 2021, lithium prices began to stabilize in the first few months of 2022.

Demand for the battery metal is expected to soar in the coming decades, with questions about supply increasing.

How did lithium perform in the second quarter of 2022, and what’s ahead for the commodity in the near term? The Investing News Network (INN) asked experts about the main news that impacted the lithium market in Q2, plus a look at what investors should watch for during the rest of the year.


Lithium market update: Price performance

Last year saw lithium climb on the back of strong demand from the electric vehicle (EV) industry, and even though prices have started to stabilize, they're up over 123 percent, as per Benchmark Mineral Intelligence data.

On the supply side, availability of material from domestic Chinese brineresources ramped up as expected over late Q2 as warmer weather improved seasonal evaporation rates, analyst Daisy Jennings-Gray told INN.

Meanwhile, on the demand side, COVID-19 lockdowns in China, particularly Shanghai, gave rise to an unexpected hit on demand from the EV sector, with a number of vehicle manufacturing plants shutting down over April.

“Given growing concerns over rising COVID-19 cases in China, combined with reports that Chinese regulators were looking to prevent prices from climbing so rapidly, there were some expectations at the beginning of Q2 that lithium prices might not see the same upward climb experienced in Q1, with this expectation coming to reality,” Jennings-Gray, who works for Benchmark Mineral Intelligence, said.

Speaking with INN at this year’s Fastmarkets Lithium Supply and Raw Materials conference, William Adams of Fastmarkets said the demand pullback is temporary.

“What we're seeing is just a pause on the demand side because of the lockdowns in China,” he said. “And I think it's more that consumer demand has been constrained rather than falling back.”

As lockdown measures ease, Adams is expecting lithium prices to move higher.

“I don’t think we’ve seen the peak in prices yet,” he told INN at the event, which was held in Phoenix, Arizona. “We expect to see that towards the end of this year, or maybe the first quarter next year.”

Listen to the interview above for more thoughts on lithium from Fastmarkets' Adams.

For Martin Jackson of CRU Group, prices have remained higher than expected due to renewed demand from China post-lockdowns. “(We) certainly expect them to track lower in Q3 before demand returns again in Q4,” he said.

Lithium market update: Supply and demand

At the end of 2021, most analysts agreed that demand would outpace supply in 2022, and they 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.

June figures from the Chinese EV market show that the industry has already seen a significant recovery following lockdowns in Shanghai, with record-breaking production and sales numbers. For 2022, EV sales in the leading Asian country are expected to reach 6.4 million units, more than double 2021 levels, S&P Global predicts.

“Provided there are no further strict lockdowns that could impede production, it seems like demand from the EV sector will continue to accelerate into Q3,” Jennings-Gray said.

The market still looks tight heading into H2, with a limited number of new lithium projects set to come online.

“There are some expansion ambitions in the pipeline that could provide some additional supply-side relief if project timelines are met. However, it seems unlikely that this will balance strong demand from the EV industry,” Jennings-Gray added.

It is probable that demand hindered from the second quarter will be shifted to the second half of the year, “when demand is typically at its highest anyway,” the analyst said.

All in all, Benchmark Mineral Intelligence is still forecasting a lithium market deficit in 2022.

“Investments from Chinese majors into lithium resources in Jiangxi province, alongside improved utilization rates at existing mines in the region, led to a slight increase on the supply side from the Chinese domestic market in the Q2 forecast,” Jennings-Gray said. “However, our expectations over the ability to ramp up this supply further remain conservative, hence we don't expect to see the market balancing on this alone.”

At the same time, demand has remained strong yet stable despite COVID-19 lockdowns in China.

“So we haven't factored in any relief from the demand side, with any stymied demand in Q2 pushed to the latter half of 2022 or early 2023,” Jennings-Gray said.

Lithium market update: Oversupply fears hit, stocks under pressure

During Q2, investment bank Goldman Sachs (NYSE:GS) released a report that increased investors' worries over potential excess lithium supply; the bank also predicted a sharp correction in prices by the end of next year.

However, for Benchmark Mineral Intelligence, the lithium market will remain in structural shortage until 2025.

“The lithium market will balance over the next few years, but it’s unlikely that an unprecedented ramp-up of marginal, unconventional feedstock will fill the deficit. It is also unlikely that demand will weaken significantly,” analysts at the firm said in a note.

Similarly, iLi Markets' Daniel Jimenez doesn’t think supply will be able to catch up with demand at least until 2026 to 2027, mainly because of the difficulty of bringing greenfield projects into production at full capacity.

“Over this period of time, lithium should be the limiting factor in EV sales,” he told INN. “Even with demand growing very strongly, the investments the industry is making today might yield additional capacity in six to 10 years from now that we are not able to see today.”

Speaking with INN in late June, lithium expert Joe Lowry of Global Lithium said the market is in a real structural shortage that is going to last a few years.

“It will be internalized by just about everybody by 2023,” he said. “It's going to be an interesting few years. But I do think that the lithium situation will force adjustments by the OEMs.”

Listen above to learn why lithium expert Lowry thinks lithium's time has come.

With macroeconomic variables hitting the stock market and bearish reports calling for an oversupply situation, lithium stocks have been experiencing downward pressure.

Commenting on the disconnect seen between the stock market and lithium prices, Jon Hykawy of Stormcrow Capital said the electrification of fleets is unstoppable at this point.

“How fast we're going to see that transition, I guess, is the question,” he told INN during an interview at the Fastmarkets lithium conference. “But at this point, optimism is warranted and the stock market eventually will get over whatever it's getting over and it will come back.”

For Chris Berry of House Mountain Partners, when commodities price takes off, it is usually expected to see the equities follow suit. “It's no surprise, in my view, to see the equities kind of take a breather,” he told INN in June.

Berry talked to INN about lithium prices and what's ahead for the market. Listen above to learn more.

When asked about the main challenges faced by lithium miners to bring new supply to the market, CRU’s Jackson pointed to a shortage of technical skills to construct and ramp up new lithium production capacity.

“(Another factor is) attracting investment into mining instead of the middle of the value chain, which has been difficult in the past due to reputational concerns, volatility and environmental, social and governance issues."

For producers, ramping up supply to meet demand will remain a challenge, Jennings-Gray said, with some miners already announcing ambitious expansion projects this year in a bid to keep up with customer requests.

“Further downstream, high feedstock prices will likely be a challenge for refiners, who will continue to see their margins squeezed,” she said.

For newer lithium project developers, sticking to project timelines remains an obstacle.

“(This is) particularly (relevant) if project financing is hinged on offtake agreements that contain deadlines for first delivery, although there are very few new projects set to come online before the end of the year, so this is more of a longer-term target to meet,” Jennings-Gray added.

Commenting on junior mining, Emily Hersh, CEO of Luna Lithium, said entering the lithium market isn't an easy task, and new entrants to the industry face many hurdles.

“There's a lot of noise in terms of what's happening in the market. You really can't control what market conditions are going to be at any given point in time,” Hersh told INN.

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

As the third quarter of the year continues to unfold, there are a few factors that could impact the lithium space.

Typically, additional supply from the Qinghai brine projects across the summer months provides some supply-side relief in China, so this may contribute to continued stabilization across late Q2 and Q3, Jennings-Gray said.

“However, demand remains very high, and EV production and sales statistics rebounded significantly in June following the easing of lockdown restrictions in July, breaking records,” she said. “This could drive some further upside potential for lithium pricing, with demand for carbonate within the Chinese domestic market particularly robust under the resurgence of lithium-iron-phosphate cathode production.”

Outside of China, it is expected that contracted prices will continue to catch up with the Chinese domestic market over Q3, as they did in Q2.

“Although some of the stability in the Chinese market will be translated through to the international market, so price increases may not be quite as significant,” Jennings-Gray said.

The global economic picture will also play into lithium market dynamics in Q3.

“Recession risks, debt levels in China (and) surging inflation cutting into real income in North America and Europe” are all factors that could impact the space, CRU’s Jackson said.

Additionally, the Russia-Ukraine conflict will remain a focus in the European and North American markets.

"The hydroxide market remains very tight given restrictions on the purchasing and transportation of Russian material, which previously acted as a notable source of hydroxide supply for the European market," Jennings-Gray said. “Concerns over hydroxide supply are likely to extend across the rest of the year.”

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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