Lithium

Lithium price support from Chinese production cuts: Macquarie

Mon 05 Dec 22, 10:44am (AEDT)
Lithium Brine
Source: iStock

Key Points

  • A leading Chinese lepidolite producer suspended production last week due to environmental concerns
  • Regulators are investigating a water pollution incident, with no timeline for production redemption
  • Macquarie views the issue as a potential downside risk to China's lepidolite output, which could lead to an 'even tighter lithium market'

China has landed itself in the environmental hot seat after major lithium refiner Yongxing Material was forced to suspend operations at its lepidolite refinery, pending a water pollution investigation.

"The water quality of Jinjiang River was found to be abnormal during daily monitoring ... and the ecological and environmental departments are conducting investigations upstream and downstream," Yongxing said in a statement.

"... if the disposal of tailings and lithium slag cannot be properly dealt with, as the subsidiary accounts for as much as 95% of the net profit of the listed company, a thunderstorm may endanger the company's development prospects."

Yongxing has not provided a timeline for production resumption.

'Production impact is much wider'

Macquarie analysts describe Yongxing as a 'leading lepidolite producer in China' with a nameplate capacity of 20,000 tonnes per annum of lithium carbonate equivalent (LCE).

Lepidolite is a gemstone known for its high levels of lithium. An environmentally intensive process of grinding, water leaching and filtration is used to extract lithium from lepidolite.

"We note this environmental issue is not unique to Yongxing and has impacted other major lepidolite producers in China, including Nanshi, Jiangte, etc, who have all suspended their operations due to wastewater treatment concerns," the analysts said in a note last Friday.

The total impacted capacity represents a 'great majority' of Chinese lepidolite production, with the potential to reach as much as 100,000 to 200,000 tpa of LCE, according to Macquarie.

To add some perspective, Allkem's (ASX: AKE) Olaroz project produced 12,863 tonnes of lithium carbonate in FY22.

"We believe this water pollution incident could also lead to more stringent environmental policies in Jiangxi province, the hub of all major lepidolite producers and developers," said Macquarie.

Preferred lithium picks: Macquarie

Macquarie's top lithium picks have mostly stayed the same compared to a few months ago.

The investment bank prefers Mineral Resources and IGO but also sees value in Pilbara Minerals through its Pilgangoora operation, Allkem via its diversified lithium exposure and Liontown as one of the next major projects to come online.

Ticker

Company

Rating

Target price

Upside

MIN

Mineral Resources

Outperform

$125.00

41%

PLS

Pilbara Minerals

Outperform

$7.70

62%

IGO

IGO

Outperform

$21.00

31%

AKE

Allkem

Outperform

$21.00

49%

LTR

Liontown Resources

Outperform

$3.40

68%

GL1

Global Lithium

Outperform

$4.40

90%

CXO

Core Lithium

Neutral

$1.80

34%

 

Source: Macquarie Research

 

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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