What Lithium Investors Should Consider Beyond Surging Prices

Strong EV sales send lithium prices soaring

EV sales have been steadily rising as governments around the world push to move away from fossil fuels. As a result of this surge in EV sales, lithium demand has climbed, pushing prices through the roof — lithium took a turn at the start of 2021, even as global markets faced the uncertainty brought by the COVID-19 pandemic.

The Benchmark Mineral Intelligence lithium index is up over 440 percent year-on-year, and had jumped more than 88 percent so far in 2022 as of March 7.

Lithium prices have defied even the most bullish expectations, Chris Berry of House Mountain Partners told the Investing News Network (INN).

“Given the insane demand, I think you could easily see higher lithium prices before 2022 is over,” Berry said. “Of course, just how high they go is anyone's guess. Given the relatively small cost of lithium relative to the overall cost of an EV, there is clearly room for lithium pricing to run higher.”

Sales of EVs doubled last year, with most of the increase coming from Europe and China, where there was little impact on new energy vehicle sales despite a subsidy reduction. In 2022, that strong growth trend is expected to continue, especially in the US, as the country plays catch up with other regions.

“Other reasons for expecting strong growth are there will be more EV models available, therefore more choice for consumers, and an easing of semiconductor shortages as 2022 progresses should mean supply constraints should not hold sales back,” Fastmarkets’ William Adams told INN back in December. “But we also expect demand from energy storage applications to gather pace.”

Understanding spot and long-term pricing for lithium

As EV sales strengthen, so too will demand for lithium, which is forecast to continue to outpace supply, leading to a positive environment for prices.

Commenting on how prices are expected to perform this year, Daniel Jimenez of consultancy iLi Markets told INN that prices will primarily depend on how many EVs are sold during 2022.

“If EV sales grow to 9 million, we might see prices normalizing above US$20 during the second half of the year,” Jimenez, who previously worked for top lithium producer SQM (NYSE:SQM), said. “However, if EV sales reach 10 million to 10.5 million, then we will most likely see the prevailing price level to remain through the year.”

But investors should keep in mind that lithium traded at spot prices only reflects a portion of the market. In fact, most lithium is locked up in contracts, which in some cases include fixed pricing.

Looking ahead at how pricing dynamics will play out in the lithium market, Berry said contracts will be less focused on fixed pricing, but will have floors and ceilings built in to protect both producers and consumers.

“I would also think that while contracts may trend longer in duration, short-term deals will remain a significant part of this market,” he said. “Hopefully, the futures market contracts that have been introduced by the London Metal Exchange and CME Group will gain traction and aid in price transparency and discovery as well.”

In recent weeks, top lithium producers Albemarle (NYSE:ALB) and SQM have posted their 2021 year-end and fourth quarter results, in which long-term contracts and future pricing are also discussed.

“Average realized pricing is expected to increase 40 to 45 percent reflecting tight market conditions and the implementation of variable price structures on long-term contracts,” US-based Albemarle said.

Rival SQM said only about 20 percent of its sales volumes are tied up in fixed-price contracts or at variable prices with specific floors and ceilings; about 50 percent is set at variable prices tied to specific benchmarks.

“The remaining 30 percent of our sales volumes for 2022 are still open,” SQM said. “Based on this and the pricing dynamics we have seen in the market, we believe that prices in Q1 and Q2 of 2022 should be significantly higher than prices reported during the fourth quarter of 2021.”

Key factors beyond high (or low) lithium prices

Lithium prices are at all-time highs with no signs of losing steam. Between that and increasing overall market uncertainty, it is easy for investors to put most of their attention into whether lithium prices will go up or down.

“I would pay close attention to the trend in lithium pricing, but as there is no single lithium 'price,' I wouldn't lose too much sleep over what the exact lithium price is or should be,” Berry said. “I would, however, pay close attention to the price of high-purity spodumene as this feeds into both carbonate and hydroxide pricing.”

Spodumene is found in hard-rock lithium deposits, with top producer Australia hosting many of these mines. Spodumene prices have been on the rise as well, with some Australian miners posting half-year profits as a result.

This year, prices for spodumene are forecast to rise to an average US$1,185 per tonne, up from around US$720 in 2021, while lithium hydroxide is expected to rise from US$7,300 per tonne in 2020 to US$18,940 in 2023, according to Australia’s Office of the Chief Economist.

Investors can certainly use specific pricing to calculate margins and profitability, “but you must keep in mind that most lithium prices you see are indicative rather than specific,” Berry added.

Prices for lithium could see turns to the upside or downside throughout the coming years, but the focus of investors should remain on the main demand driver: EVs.

“I would focus on EV sales and the ability or lack thereof of lithium producers to add supply to the market and achieve a battery-grade specification,” Berry said.

Jimenez agreed, saying that when looking at the lithium market, 90 percent is about considering EV sales forecasts. “The remaining 10 percent is to assess if the lithium required for these EV sales can be mined,” he added.

In fact, for Jimenez, the main question right now should be centered on how many EVs can be sold globally considering the amount of lithium supply expected.

“Lithium production for the coming three to five years is a given by project developments that took place three years ago,” he said. “Not much can be made about that at this point, and therefore, it is EV sales that will define whether this lithium production is sufficient ― in my opinion, probably not.”

On supply, Berry said that a factor to watch is lithium producers' ability to scale up output economically.

All in all, this decade will be a time of increased need for mined lithium. This is why top producers have outlined plans to restart expansion plans or have outlined new ones, and why mergers and acquisitions could continue to take place in the market moving forward.

“This will continue until recycling, and particularly lithium recycling, starts to play a role, which will probably happen during the first years of the next decade,” Jimenez said. “At that point the inventory build up of lithium will be so big, in EVs, that recycling will become a major actor in the supply chain.”

Another factor to consider when looking at the lithium market is battery technology developments.