Barely a day goes by where some international mining juggernaut or local billionaire doesn’t make a takeover bid for an Aussie lithium company, or at the very least, sneakily appear on its register.
But the price of lithium minerals like lithium carbonate, lithium hydroxide, and spodumene, which is important for local producers like Mineral Resources (ASX: MIN) and Pilbara Minerals (ASX: PLS), have plunged around 75% since the start of the year.
There are two main reasons for the rout in lithium minerals prices.
Firstly, prices were probably too high - as is typically the case in your typical commodity price cycle. Prior to the huge 2022 bull market, prices of lithium minerals suffered a withering bear market between 2018 and 2020. This led to lower production and underinvestment in the sector.
But, as EV demand ramped up at the start of this decade, particularly in the world's largest EV market, China, prices rocketed. All of a sudden, battery manufacturers needed a pile of lithium when there wasn't much around. Inevitably, supply anxiety drives the demand side to over-bid for a commodity.
Locally, the ASX lithium sector boomed on countless bottom-left-top-right charts showing spiralling demand for EVs, as well as the resultant forecast deficits in lithium minerals. This boom was underpinned by a blatantly obvious narrative that investing in lithium was a no-brainer.
Supply dutifully arrived, as it always does, because the best cure for high commodity prices is high commodity prices. Prices moderated, and here we are today, with most lithium stocks having followed mineral prices down.
The second reason for the rout in lithium prices came from the demand side. In late 2022, China increased subsidies for the purchase of small, lower cost internal combustion engine ("ICE") vehicles, while simultaneously ending or scaling back a range of EV subsidies.
Around the same time, harsh movement restrictions imposed by the Chinese authorities had caused a major slowdown in motor vehicle demand in the country. In response, Chinese ICE manufacturers slashed their prices to try to drum up demand, putting further pressure on EV sales growth.
The result was a modest reduction in the number of EVs sold in China. But while demand fell slightly, it was a real shock to an EV supply chain which had grown accustomed to 70% p.a. plus growth rates.
Then, in February, the world's largest electric battery manufacturer, China's CATL, began offering significant discounts to EV manufacturers and other OEMs.
The discounts implied roughly a halving in lithium minerals prices, and smacked of a major build up in stock piles of raw materials at CATL which controls over one-third of the world's electric battery manufacturing capacity, and others.
In March, China's two biggest lithium minerals producers tried to stem the bloodletting in prices by agreeing to a price floor for lithium carbonate. I won't use the old saying about no honour among…well you know what, but needless to say, this agreement did nothing to stop the rot. Lithium carbonate prices are presently trading at roughly half of that floor price.
So here we are. Boom, bust, stockpiling, and destockpiling. But one thing is consistent - and this is the tidbit I believe lithium bulls on social media and in mining company boardrooms are betting on:
"China EV sales, and indeed global EV sales, still show solid growth rates in the 20's and teens of per cent, respectively."
Surely then, at some stage this must impact lithium minerals prices and "right the ship" so to speak? I can't argue with the logic. I can see the data showing rising sales of electric vehicles (EV), as well as growing demand from the energy storage sector. I get it, but I just don't think this makes another lithium bull market a certainty.
Morgan Stanley might have some answers for us. The big broker notes potential "downside sales risks" for China EVs in the near term as discounts deepen, and newer, better EVs are released to the market. Rather than stimulating demand, the broker believes it will send a message to buyers they can afford to wait for even cheaper EVs before purchasing.
On the lithium destocking vs restocking conundrum, Morgan Stanley notes "battery inventories remain elevated", but lithium carbonate inventories at Chinese domestic producers have come down, and are likely to be "no more than ~20kt".
Overall, the broker believes softer Chinese EV sales and a ramp up in supply, particularly from African nations, increases the likelihood of lithium carbonate prices "overshooting" their their target of US$20,000/t. FYI, the current average spot price for lithium carbonate is $19,560/t according to Shanghai Metals Market.
Ultimately, perhaps the most anticipated turnaround in the price of a commodity in history will hinge upon the next Chinese restocking cycle. According to analysts at metals think-tank Fastmarkets, battery manufacturers are already seeing an uptick in new orders from EV battery makers, who "are now looking to replenish their lithium material".
My tip is the resumption of restocking may only stabilise lithium minerals prices, or only facilitate a modest recovery. I believe the days of skyrocketing lithium minerals prices are consigned to history along with so many other commodity price booms which came before it, and of course, tulips!
Demand is coming, I concede that, but supply is coming too. Without panic at battery manufacturers responding to uncertainty over securing supply to meet growing demand from EV manufacturers, I don't foresee another exponential move up in lithium minerals prices like those we saw in 2022.
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