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Benchmark Mineral Intelligence: Lithium oversupply not likely

In response to a Goldman Sachs research note which suggested that the lithium market will pivot to a prolonged phase of surplus this year, Benchmark Mineral Intelligence took the unusual step (for the analytics firm) of outlining the reasons why it believes that call on lithium is incorrect.

  1. The industry cannot rely on China feedstock meeting the market. Goldman sees the most “significant” new lithium supply as coming from China, where companies have invested in new hard rock and brine projects. However, Benchmark points out, known domestic Chinese spodumene and other hard rock resources are low-quality, a key reason why there has been an increasing reliance by Chinese converters on Australia for supply instead.

    Chinese brine resources are also low-quality and have always struggled to produce meaningful volumes of lithium into the market, let alone of battery-grade quality.

    Production of lithium from China’s Qinghai province has struggled to ramp up production despite over a decade of efforts, including by electric car maker BYD.

    China’s deposits of lepidolite, which Goldman expects to add significant new supply volumes, may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply. Chinese lepidolite processing has a high waste-to-ore ratio of 20:1, subsequent high waste-disposal costs, and high processing costs, all of which make it a marginal source of lithium. Associated opex and ramp up times are also commonly underestimated.

  2. Capacity does not equal supply. Building capacity in the lithium market does not equal supply, particularly in China, where companies often need to separate designed capacity from effective capacity. Of that capacity, recovery rates apply—i.e., the rock you dig out of the ground will not all make it into a car.

    Even outside of China, planning does not always equal reality, with recent efforts to build lithium processing facilities suffering from rising costs and delays.

    Tianqi Lithium’s Kwinana lithium hydroxide refinery in Western Australia was announced in late 2016 and set to start at the end of 2018. Instead, first production occurred in the second quarter of this year, with full production targeted for 2025.

    Building upstream of the EV battery supply chain takes time and rarely goes to plan. For Tianqi it’s been the best part of a decade.

    —Simon Moores, chief executive of Benchmark Mineral Intelligence

  3. New lithium supply comes at a higher cost base. As demand for lithium grows, deposits with unconventional mineralogy, lower grades, and higher strip ratios will be developed. But at the same time, the advent of new, often smaller and inexperienced converters with unintegrated feedstock sources will mean that the costs of conversion increases, and recovery rates stagnate.

    In the last two years, higher inflation, supply chain bottlenecks and cost-blowouts have pushed incentive prices higher. Some new lithium supply also relies on new technologies which will add higher costs. As a result it’s unlikely that lithium prices will drop back down to previous lows, Benchmark said.

  4. Contract pricing is important as the market balances. Benchmark tracks the volume of lithium under contracts and spot prices, and forecasts prices accordingly. A large portion of the market is under long-term fixed price contracts, and an equally significant portion is under contract with variable prices. These must be taken into account when balancing global prices in the current market, but also forecasting for the next two to three years.

    Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark’s Lithium Forecast. Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now.

    It’s important to remember that there is no one single lithium price, Benchmark added.

  5. Understanding how lithium chemical capacity is used is crucial. A lot of lithium chemical capacity is being used to reprocess material that does not meet downstream specifications. This eats up existing capacity and merely represents lower efficiency production rather than the introduction of new lithium units to market.

    When the rest of the world slowed its lithium investment in the trough of the previous price cycle, China remained aggressively committed to adding conversion capacity; often from relative newcomers to the industry. Not only will a lot of this new capacity operate at a low utilization rate in the initial years of production (if not, indefinitely), a significant proportion of capacity that does find its way to market is locked into reprocessing or tolling arrangements which will not address the underlying market shortfall, Benchmark said.

Benchmark’s view is that 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.

In short, there will not be the structural oversupply that Goldman Sachs is predicting.

In a period when we’ve seen prices top record highs persistently over the past 10 months, a correction in the lofty spot market prices seen in China is likely. End-users can only absorb so much cost pass through before it has an unsustainable impact on their electric vehicle ambitions.

However, the spot market price in China does not represent the true price of lithium in the market, and is often not the true price being paid by western battery majors. In these markets we expect to see a gradual ramp up in contract deals being settled with increasingly flexible, and more frequent, pricing mechanisms.

As the market wrestles between long-term supply security to fuel the lithium ion economy, and increasingly market-led pricing mechanisms to incentivize supply growth, the era of lithium market volatility is likely just beginning.

—Benchmark Mineral Intelligence


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