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How long can the lithium bull run last?

Lithium, one of the principal ingredients of the Lithium-ion battery used for electric vehicles, has been on a bull run since 2015. Production increased substantially in 2017 with a flurry of new investors bringing capacity on stream, meaning there’s no sign of deficit, and further major mine increases are set to come in the next two to five years.

Prices still haven’t let up, remaining high after doubling in 2016, although some analysts foresee the possibility of market prices peaking this year.

Consultant Roskill puts mine production at 297,300 mt of lithium carbonate equivalent (LCE) — excluding Direct Shipping Ore of 72,900 mt LCE in 2017 — up from 209,000 mt LCE in 2016. This compares with production and consumption of some 150,000 mt LCE in 2015.

Despite last year’s increased production, prices rose substantially: battery-grade carbonate contract prices jumped 47% to $11,250/mt CIF Asia, with battery-grade hydroxide up 5% to $12,500/mt, according to the consultancy.

Market volatility means sales are made largely on bilateral deals, with prices negotiated quarterly, or using Chinese spot market prices.

And further price rises are foreseen: analysts Canaccord Genuity and SP Angel see prices for 2018 in the $14,000/mt range, while UBS has been cited by producer sources as seeing carbonate prices FOB out of South America at an average of more than $16,000/mt this year, with some indications of an easing late in the year.

“There is no alternative to lithium, we’ll see a bull run for the next ten years because car manufacturers have decided the batteries are going to be lithium,” said Gerard Reid, founder of corporate advisory and asset management company Alexa Capital, speaking at the recent Mines and Money London event.

However, a new flurry of merger and acquisition activity involving carmakers eager to lock in supplies may boost Lithium Production capacity quicker than expected until recently, which may end up capping prices.

An estimated 100 junior miners have already piled into the lithium space since 2015 amid the EVs hype.

Lithium is expected to move from a current situation of tight supply into surplus from 2021-22 as new mine projects currently planned or under construction come on stream, according to Catherine Girard, energy and raw materials expert leader at automaker Groupe Renault, who sees automotive battery demand taking 39% of all lithium supplies by 2025, up from 14% in 2015.

So what makes lithium so special? And why is it the darling of the investment community?

Unlike other battery metals, there is no easy substitute for lithium, considered the primary battery material as it has the highest electrochemical potential of any metal.

Research continues apace on changing chemistries to enhance cost-effectiveness: the plan is to move towards so-called 811 batteries, made from eight parts of nickel to one each of manganese and cobalt. But for now lithium remains the mainstay.

Some 80-90% of lithium production comes from four big producers, considered more chemical companies than miners: Albemarle, Sociedad Quimica y Minera de Chile (SQM), FMC and Sichuan Tianqi. In addition, output is focused on the “lithium triangle” of salt lakes of Chile, Argentina and Bolivia.

However, this is changing with the advent of more Chinese investors, junior mining companies and even mining major Rio Tinto, which has a large high-class deposit in Serbia, currently undergoing feasibility study.

Chinese, carmakers’ presence growing

Chinese investors, including carmakers, are notably expanding their presence in lithium mining, and already control some 60% of the world’s lithium chemical facilities for processing, essential for lithium’s use in lithium-ion batteries.

Chinese investment company NextView Capital has committed to pay GBP31 million ($43 million) for a 20% stake for Toronto-listed Bacanora Minerals, which guarantees it a supply of battery grade lithium metal from a major project soon to ramp up in Mexico.

Bacanora’s share price skyrocketed 91% in the year to early January. Shares for other junior lithium miners Nemaska Lithium and Galaxy Resources rose 50% and 40% respectively over the same period.

Chinese carmaker Sichuan Fulin Industrial Group has struck a memorandum of understanding to take equity and offtake in Minera Salar Blanco, part-owner of Chile’s Maricunga lithium mine project. The share price at SQM, also a target for a partial takeover, has leapt over 90% over the past year.

It’s not only Chinese companies driving M&A activity in the lithium sector. Japanese carmaker Toyota’s trading arm in January agreed to buy a 15% stake in Argentina-based lithium producer Orocobre, whose Q4 2017 sales revenues jumped more than 72% from the previous quarter.

The miner now plans to accelerate a capacity boost to triple lithium production to 42,000 mt/year by 2019, in a $271 million investment, partly financed by Japanese corporations.

According to a report last week from SP Angel, EVs producer Tesla Motors has now stepped in to eye “global lithium dominance” via investment, including in processing facilities, in SQM, which has recently resolved a long-running dispute with Chilean development agency Corfo that would allow the miner to quadruple lithium production by 2026.

SP Angel sees prices falling to $10,000/mt and $12,000/mt for carbonate and hydroxide respectively in the longer term as new production comes on stream.

Still, the market fundamentals look firm: and suggestions that this will continue to be a very attractive market for another decade are not unreasonable.

Plans for construction of new battery production capacity have led SP Angel, Roskill and BoA Merrill Lynch Global Research to see global consumption of lithium notching up annual growth of some 16% a year for the next few years, leading to a tripling or quadrupling of demand over a 10-year period, from 184,000 mt LCE in 2015, with the most bullish forecast putting this at well over 800,000 mt LCE/year in 2026.

— Diana Kinch, with the collaboration of Marcel Goldenberg

The post How long can the lithium bull run last? appeared first on The Barrel Blog.

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How long can the lithium bull run last?

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