Bad news lithium bulls, this analyst "remains bearish on the near-term price outlook"

There's so much conflicting information doing the rounds for both the demand and supply sides of the lithium price equation. Firstly, there are several lithium minerals that factor into the supply chain, from lepidolite, to lithium carbonate and lithium hydroxide, to spodumene. Making it even tougher, price data for each of these minerals is very China-centric and often opaque.

I like to think I am well-read on both the lithium demand and supply chains, but what I don't have is boots-on-the-ground experience of what's going on in the heart of the problem and solution for the current downturn in lithium prices – China.

So, a UBS broker note that came across my desk yesterday caught my eye. In it, there's a one-pager on a call with their China lithium analyst Sky Han regarding her recent travels to investigate the Chinese lithium supply chain. Bad news lithium bulls, the note suggests Han "remains bearish on the near-term price outlook" for lithium minerals.

Supply vs demand...

There are several reasons for Han's bearish view.

On the supply side:

• Chinese production of lepidolite is about to ramp up, driven by lower costs of production.

  • Lepidolite is lithium ore like spodumene, which is the primary lithium ore produced by Australian-based miners like Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN), Core Lithium (ASX: CXO), IGO (ASX:IGO), and Liontown Resources (ASX:LTR).

  • China has vast reserves of lepidolite, which is generally lower grade than spodumene, and they've leveraged this to satisfy much of their own voracious demand for lithium in the battery supply chain.

  • Han estimates costs at Chinese lepidolite producers have plunged from around RMB 150,000/t at the start of the year to closer to RMB 100,000/t, and

    could fall as low as RMB 80,000/t.

• Zimbabwe spodumene production is coming online in the RMB 80,000/t-100,000/t range of the cost curve.

On the demand side:

• Battery component makers are facing substantial headwinds in pricing from EV manufacturers, who are themselves facing tougher production and market economics. As they get "squeezed" on the sales side, they're naturally demanding discounts in the market for battery input materials like lithium.

• Inventories at Chinese battery manufacturers have been run down, but processors still have around 2 months of finished chemical. Some battery makers are "beginning to build inventory", however.

• The market is moving away from lagged contract pricing to spot pricing as battery makers aim to control their costs.

• Han does not expect material restocking before "2Q-2024"

Equals price

Putting the above together, it appears we have an environment of growing supply from domestic Chinese lepidolite producers and Chinese-funded African spodumene, against a backdrop of subdued demand and limited restocking in the interim from battery manufacturers.

UBS notes contracts for April are now pricing the equivalent for around US$12,900/t for battery grade lithium carbonate and sub US$1,290/t for 6% spodumene concentrate. This compares to the broker's prior estimates for 2024 of US$23,000/t and US$1,800/t respectively – so prices are tracking about 30% lower than expected.

Spodumene concentrate price versus April 2024 market pricing and UBS estimates of Chinese lepidolite producers cost-base

If prices were to plumb the RMB 80,000/t forecast cost floor of Chinese lepidolite producers, UBS notes this could equate to a spodumene concentrate price of around US$800/t, which the broker suggests "would have material ramifications for the WA lithium industry".

Read this article to get a better idea of what US$800/t spodumene would do to the profitability major ASX-listed spodumene producers.

Factors to watch

UBS ponders what could occur to "rebalance the market". It is possible lower market pricing pushes higher-cost producers out of the supply chain, as well as forcing a scaling back of planned ramp-ups. Ultimately though, some supply "discipline" from the "incumbents" is probably required to stem losses in lithium prices.

Timing is everything in markets, and lithium bulls no doubt would love prices to bounce as soon as possible. Outside of the UBS note, much of the narrative surrounding a potential recovery in lithium prices has centred on the inevitable and imminent restocking of inventories at Chinese battery manufacturers.

The bulls say long-term demand for lithium is growing as the world transitions to EVs and battery storage, and the recent drop in prices is merely a short-term blip in a brighter bigger picture. If this is the case, then Han's comments of limited material restocking before the second quarter of 2024 is potentially the most important snippet from the UBS note for me. If this is true, it could still be many months before the low in lithium prices is in.