Lithium Market Sees Boost in Investment: Has the Price Bottomed Out?

Over the past two years, lithium prices have demonstrated volatility by reaching record highs in 2022 and then experiencing a significant decline in 2023. The prices have finally seen a rebound, accompanied by a notable uptick in investment activity within the industry, signaling enhanced market sentiment and demand. Key highlights of these activities include:

Supply disruptions from China's environmental inspection: As one of the key regions for global lithium resource supply, Yichun in China, often referred to as "Lithium Capital of Asia", has been facing stringent environmental policies in February. Local authorities have mandated lithium processing enterprises to self-inspect their environmental compliance and enforce strict tracking of the disposal routes for refining slag. These measures have led to temporary halts in the transportation activities of some companies, causing disruptions in lithium supply. Morgan Stanley wrote in an overnight report,

Heightened expectations for production cuts: Chinese lithium carbonate producers have been reducing their output due to the decline in demand. Records from Shandong Longzhong Information Technology Co. Ltd reveal that factory operating rates decreased from 52.5% on February 9, the day before the Lunar New Year holidays commenced, to 45.73% by the end or February.

Production forecasts for Australian lithium mines are also showing signs of contraction. Mt Cattlin, one of Australia's key lithium mines, is expected to account for 7% of the country's primary lithium production in 2023. According to the financial report, due to cost pressures, the projected production of spodumene concentrate for 2024 is set to be significantly reduced by 36.6% to 130,000 tons, which equates to a decrease of approximately 9,500 tons of LCE (lithium carbonate equivalent).

The outlook for lithium prices remains a point of contention in the market. Key concerns include:

The lithium market's stability is largely reliant on the demand for electric vehicles (EVs) as they are the primary consumer of lithium. Following a period of heightened activity and publicity over the past few years, EV sales have decelerated in 2023 and are expected to continue to do so. According to BloombergNEF, the sales of all-electric vehicles, combined with plug-in hybrids that can operate on gasoline or diesel, increased by over 100% in 2021 and 62% in 2022. However, the number declined to 31% last year, with plug-ins accounting for 15% of all vehicles sold.

Despite several companies announcing their plans to reduce production, the market is still projected to remain in a state of oversupply. Moreover, if lithium prices continue to surge, market participants may choose to resume production, causing the upward momentum to quickly dissipate. William Adams, Fastmarkets' head of battery and base metals research, said,

According to Citi analysts, there is still robust growth in the demand for lithium, but they are waiting for a supply response at current prices to determine the sustainability of the current rally. The brokerage firm has concluded that lithium prices have reached a near-term bottom, and the long-term demand growth rates remain unchanged. They anticipate that prices could gradually increase towards approximately $20k/t by the end of this year.

Matt Griffin, a fund manager at Maple-Brown Abbott Ltd. in Sydney, said, "I suspect we are at or close to the bottom in lithium prices. The sign we are looking for to get bullish on the space is an increase in demand — either through EV demand surprising to the upside, or a restocking cycle in the battery supply chain."

Jun Bei Liu, a hedge fund manager at Tribeca Investment Partners in Sydney, said, "Double-digit capacity has already been taken out of the lithium market and that usually is a sign that the commodity price is bottoming."

However, not everyone is convinced about the rebound. Goldman Sachs cautioned that the increase in price should not be interpreted as the end of the bear market, as there is still a significant surplus.

Citi has turned bearish on lithium. Their commodity team predicts a significant surplus in the lithium mining market within the next 18 months and advises investors to take profits when prices rebound. Citi has revised down their forecast for lithium carbonate prices over the next 6 to 12 months by 17% to $15,000 per ton, which is below the long-term incentive price that encourages new supply.