Lithium price support from Chinese production cuts: Macquarie

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.

Source: Macquarie Research