Lithium Outlook 2021: Analysts Positive on Pricing, More Balanced Market Ahead

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2020 kicked off what many believe will be the decade for lithium and other battery metals. And despite the uncertainty brought by the coronavirus pandemic, lithium made headlines throughout the year.

The potential demand for electric vehicles (EVs) is growing stronger by the day, with a more balanced lithium market expected in 2021. Moreover, the trend of declining prices seems to be coming to an end, with analysts predicting a better price environment ahead.

Here the Investing News Network (INN) looks at lithium’s 2020 price performance, what analysts had to say about the market and what’s ahead for the metal in 2021.

Lithium trends 2020: The year in review

There’s no doubt that 2020 was full of uncertainty as COVID-19 hit the world, and many forecasts were overshadowed by the impact of the pandemic.

At the end of 2019, Fastmarkets’ William Adams was expecting lower prices, but also believed the slide in prices would level out. “As it turned out, we saw the low point in lithium carbonate prices reached in July 2020, with prices then rising 14 percent off the lows by the year end,” he told INN.

At the start of 2020, Fastmarkets’ battery-grade lithium carbonate prices were at 48,000 yuan per tonne.

“We expected a 6.5 percent fall, and they ended up being down 10.9 percent,” Adams said. “Given the demand hit to EVs and little in the way of supply disruptions at the hands of COVID-19, we are not surprised that prices ended up falling further than we expected.”

When looking back at 2020 expectations, George Miller of Benchmark Mineral Intelligence said the firm was also anticipating a year of steadily declining prices.

“I would say things performed as expected,” he told INN. “More recently prices have begun to increase in the domestic Chinese market, which was relatively surprising.”

This has potentially been influenced by COVID-19, according to Miller. Initially producers were selling material to maintain cash flow during the initial pandemic closures.

“Yet now they are struggling to maintain inventories and seeing surging demand on the back of a strong upward trend in EV sales, and have therefore had to begin increasing prices,” he added.

COVID-19 hit every market in different ways, but most analysts agree that lithium supply was not impacted as much as demand.

“This is because the market was already in a supply surplus, so prices did not suffer the rapid falls in other industrial metals, while the factors we envisaged, like further supply restraint, were seen, as was the stronger demand,” Adams said.

In fact, after demand from the EV sector was hurt in the first quarter, this trend took a U-turn in the second half of the year.

“The main surprise in the lithium market this year was on the demand side,” James Jeary of CRU Group told INN. “EV sales were hugely resilient, particularly in Europe. Even in China, the recovery of sales in H2 after a sluggish H1 has been very strong.”

Lithium outlook 2021: Demand

Most lithium demand comes from the battery sector, and even though demand for EVs was negatively impacted in the first few months of 2020, the EV revolution is a trend that, together with energy storage, seems to be unstoppable.

According to Fastmarkets, total vehicle sales in China are on the rise again, with EV sales picking up at a much faster pace and seeing record year-on-year numbers again.

“In Europe, not only do we have the CO2 incentives, but governments’ stimulus measures and accelerated ‘green deals’ look set to really push EV sales,” Adams said. “In addition, the introduction of many more models will provide buyers with more choice.”

Since May to June 2020, Benchmark Mineral Intelligence has also seen consistent improvements in new energy vehicle sales in both the EU and China; both sales statistics increased over 100 percent year-on-year in October compared to 2019 numbers.

“We forecast this trend to continue into 2021 as more EV models are released, and after the trend in consumer demand experienced in Q3 and Q4 2020, (we are) anticipating 2021 EV sales to increase by 46 percent year-on-year,” Miller said.

Similarly, CRU’s Jeary is expecting year-on-year growth in EV sales in China and Europe in 2021.

“However, the growth is slowing down in Europe compared to what has happened this year,” he said. “Subsidies introduced in 2020 have driven EV sales in the region, but these subsidies will be scaled back over the next few years. France, for example, has already indicated that subsidies will decrease in 2021.”

Speaking specifically about demand for lithium carbonate and hydroxide, Fastmarkets’ Adams said he expects demand to grow strongly for both.

“Strong demand growth for lithium-iron–phosphate (LFP) batteries from both the EV and ESS industries will see strong growth in demand for lithium carbonate, while strong growth of EVs in Europe, and potentially the US, will see strong demand for lithium hydroxide,” he said. “The weakness we are seeing in lithium hydroxide prices in China is more about oversupply, especially from new processors, rather than as a result of weak demand.”

In 2021, Benchmark Mineral Intelligence is forecasting that total lithium demand for all applications will increase to over 400,000 tonnes lithium carbonate equivalent (LCE).

“Lithium carbonate demand is expected to increase by 23 percent year-on-year and hydroxide up by 33 percent year-on-year, with the increases almost down entirely to the surging needs of the battery sector.”

Similarly, Jake Fraser of Roskill is expecting demand for lithium next year to go up.

“Accounting for the gradual eradication of pandemic, our outlook for demand in 2021 remains strong for both battery-grade carbonate and hydroxide,” he told INN.

Rokill expects demand for carbonate to reach 165,000 tonnes LCE, up from 139,000 tonnes in 2020, while demand for hydroxide should total 132,000 tonnes LCE. Combined, this totals approximately 297,000 tonnes LCE of battery-grade lithium compounds.

CRU’s Jeary is also optimistic on demand this year.

“Prospects are good for both carbonate and hydroxide in 2021, in line with broader demand growth,” he said. “The strength of LFP in China will ensure sustained growth for carbonate, while hydroxide will continue to benefit from NMC811 uptake.”

Lithium outlook 2021: Supply

One of the trends seen on the supply side of the lithium market has been delays in expansion plans and the temporary suspension of projects.

For Miller, supply-side responses are entirely dependent on whether the incentive price level is reached; this would encourage incumbent players to expand their capacity and new players to enter the market.

Benchmark Mineral Intelligence forecasts far improved market conditions for lithium in 2021, with the market unlikely to see the cutbacks and expansion delays it saw in 2020.

“With a more positive outlook, we will likely see incumbent players attempt to expand next year, with less cutbacks on spending as their financial health improves post-COVID-19 and pricing begins to improve,” Miller explained to INN.

Similarly, Fastmarkets does not expect to see more cutbacks, but does expect further delays to expansions and for some of the idle production to be kept idle for longer.

“Also some new or expanded hydroxide capacity is likely to be delayed,” Adams said. “We expect the restart of idle supply and supply increases from expansions to come on in a timely manner, but for them to compete for market share, which is likely to cap prices on the upside.”

Overall most analysts agree there will be a more balanced market for lithium in 2021.

“We expect the market to be largely balanced in 2021,” Jeary of CRU said, with mine supply to largely track demand growth. “We expect miners to ease production cutbacks that have been implemented over the past 18 months.”

Fastmarkets’ Adams expects to see a more balanced market, but no shortage — he said there is plenty of room for producers to respond to any pick up in demand.

“Already higher carbonate prices in China are seeing new/idle processing capacity start up/restart, and there is plenty of stockpiled material that can feed a pick up in processing output,” he said. “So the market will need to destock further before it becomes balanced.”

Miller said he expects a balanced market in 2021 too. “We actually forecast that the lithium market will fall into a small deficit in 2021 due to the continued strong sales performance from the EV sector,” the Benchmark Mineral Intelligence analyst said.

Similarly, Fraser pointed out that when focusing purely on the qualified battery-grade product segment of the market, Roskill forecasts a degree of tightness to transpire for the year.

“This is expected to result in a relatively balanced market by year end via a small battery-grade compound deficit of 3,000 tonnes LCE,” he said. “It is early in the year, however, and some additional supply is expected to be brought to market.”

Lithium outlook 2021: What’s ahead for prices

With prices as low as they are and the demand outlook blossoming, it is hard to see anything but higher average prices in 2021, according to Benchmark’s Miller.

“With recent supply cutbacks and delays due to COVID-19 and otherwise, the market has not developed enough supply to meet demand in the mid-term, which will inevitably place upward pressure on pricing,” he explained to INN.

For the analyst it is likely there will be more price improvement to come in 2021, especially towards H2, when Benchmark Mineral Intelligence expects demand from LFP producers in China to especially place continued upward pressure on domestic pricing.

Fraser agreed, saying that in light of recent price increases, mostly seen within China’s domestic market, there is still room for prices to increase throughout 2021.

“This is being driven by a decrease in the availability of product for purchase on the spot market as some downstream buyers have moved to secure large volumes under contract for the months/years ahead,” he said. “Prices have been below the cost of production for much of the industry’s producers for 12 to 18 months, and so prices are destined to reach respective breakeven cost points at some stage.”

For its part, Fastmarkets believes lithium prices are in the process of bottoming out, led by its China ex-works carbonate price. These led on the way up in 2015 to 2018, on the way down in 2018 to 2020 and again on the upside in the closing months of 2020, Adams explained.

“Prices have now got some lift off the lows. There may be a bit more room on the upside on the back of restocking, but overall the potential for a producer response is likely to mean prices are soon capped on the upside,” Adams said. “(This) will lead to prices bouncing along sideways in relatively low ground until demand grows to such an extent that higher prices are needed to incentivize the restart of idle capacity and encourage positive final investment decisions.”

Adams is waiting to see the outcome of scheduled final investment decisions at Mount Holland and Finniss in 2021, with decisions at other projects likely to be made too.

Meanwhile, Jeary said that considering spot prices have moved higher over recent weeks, CRU expects this turning point to be reflected in longer-term contract prices in 2021. “However, latent mine capacity will remain a cap on significant price gains next year.”

Lithium outlook 2021: Key factors to watch

Commenting on factors to watch out for next year, Benchmark’s Miller said the rise of lithium pricing is something to keep in mind.

“It will be important to recognize when incentive pricing begins to affect the market, and when new capacity and new entrants might come online,” he said. “As always, joint ventures, partnerships, offtakes and consolidation across the industry will also be key, as well as the nascent performance of new capacity expansions.”

CRU’s Jeary pointed to OEM investment and pledges to EV strategies, as well as government EV subsidies, as these will be significant in determining EV uptake rates.

For Fraser, another key catalyst to watch out for will be the investor attention that late-stage junior project developers may begin to receive as the second wave of demand growth rolls in over the next 12 to 36 months.

“Projects take years to build and commission, so having new mine supply in a timely fashion by the mid-2020s will be imperative to avoiding forecast market deficits in future,” he added.

Other trends that will continue in 2021 will be a higher emphasis on environmental, social and governance (ESG) issues in the industry.

“ESG has climbed up the agenda at a faster pace over the past two years, and ESG standards will be an important consideration in projects’ ability to get financing, we feel,” Adams said.

Another ongoing trend will be the localization of supply chains, especially in North America and Europe.

“Some local projects may be able to get access to financing quicker than some remote projects, even if the remote projects have better economics,” Adams said. “We expect more OEMS will try to secure upstream resources to ensure supply and to keep raw material prices contained. Currently, Asia is the main cathode producer, but we expect that to change with more cathode processors setting up around the world, especially in the EU and US.”

For his part, Fraser said that while it’s part of the story, it’s important to remember that regional EV supply chain localization is being driven by multiple factors outside of geopolitics.

“Establishing such within proximity to regional EV and battery manufacturing hubs are required for cost optimization, supplier sourcing diversification and to enable tight-knit technical quality controls between the end-user product (EV batteries) and their inputs (both raw and active materials),” he said. “Hence, the growing trend of supply-chain localization is likely to continue and where such cannot be achieved strategic company partnerships will transpire.”

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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.