Lithium oversupply is unlikely… and here are 5 reasons why. The battle between Benchmark Mineral Intelligence vs Goldman Sachs [Twitter thread unrolled]

Given recent developments, I feel fitting to bring back this piece by Benchmark Mineral Intelligence in response to Goldman Sachs. Minor edits for brevity.

Lithium oversupply? Not likely.

Why?

1) The industry cannot rely on China feedstock meeting the market

Goldman sees the most “significant” new lithium supply coming from China. Despite progress, Chinese hard rock resources are of low quality. This has led Chinese converters to rely on Australia for supply instead.

Chinese brine resources are also low quality and have struggled to produce meaningful volumes of lithium, let alone battery-grade quality.

Production of lithium from China’s Qinghai province has struggled to ramp up, despite over a decade of efforts.

China’s deposits of lepidolite might help, but are unlikely to lead to oversupply. Processing has a high waste-to-ore ratio of 20:1, high waste-disposal costs, and processing costs, making it a marginal source. Associated opex and ramp up times are also commonly underestimated.

2) Capacity does not equal supply 

Building capacity does not equal supply, particularly in China, where companies often need to separate designed from effective capacity. Recovery rates apply – the rock you dig out of the ground will not all make it into a car.

Even outside of China, planning does not always equal reality.

Tianqi Lithium’s Kwinana lithium hydroxide refinery in Western Australia was announced in 2016, set to start in 2018. Instead, first production occurred in 2022, with full production targeted for 2025.

“Building upstream of the EV battery supply chain takes time and rarely goes to plan,” says @sdmoores. “For Tianqi it’s been the best part of a decade.”

3) New lithium supply comes at a higher cost base 

As demand grows, deposits w/ unconventional mineralogy, lower grades, higher strip ratios will be developed. Inexperienced converters with unintegrated feedstock will increase costs of conversion & stagnation of recovery rates.

In the last 2 years, higher inflation, supply chain bottlenecks and cost-blowouts have pushed incentive prices higher. Some new lithium supply also relies on new tech which will add higher costs.

As a result, it’s unlikely that prices will drop back down to previous lows.

4) Contract pricing is important as the market balances 

Benchmark tracks volume under contracts/spot, and forecasts accordingly. A large portion is long-term pricing contracts, inc fixed & variable. This is key when balancing global prices & forecasting for the next 2-3 years.

Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 & 2024. Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021/2022.

While spot prices will fall, the two prices coming into more of an equilibrium than they are now.

It’s important to remember that there is no one single lithium price.

5) Understanding how lithium chemical capacity is used is crucial 

A lot of lithium chemical capacity is being used to reprocess material that does not meet downstream specifications. This eats up capacity and merely represents lower efficiency rather than new units to market.

When the rest of the world slowed its lithium investment in the trough of the previous price cycle, China remained aggressively committed to adding conversion capacity; often from relative newcomers to the industry.

A lot of this new capacity will operate at a low utilisation rate in the initial years (if not, indefinitely), a significant proportion that does find its way to market is locked into reprocessing or tolling arrangements which will not address the underlying market shortfall.

Conclusion: lithium market remains in structural shortage until 2025

The market will balance over the next few years, but it’s unlikely that an unprecedented rampup of marginal, unconventional feedstock fills the deficit. It is also unlikely that demand weakens significantly.

It will be a touch-and-go market balance; but there will not be the structural oversupply that Goldman Sachs is predicting.

In a period when we’ve seen prices top record highs persistently over the past 10 months, a correction in the lofty spot market prices seen in China is likely. End-users can only absorb so much cost before it has an unsustainable impact on their electric vehicle ambitions.

However, the spot market price in China does not represent the true price of lithium, and is often not the true price paid by western battery majors.
In these markets we expect to see gradual ramp up in contract deals with increasingly flexible, more frequent, pricing mechanisms.

As the market wrestles between long-term supply security to fuel the lithium ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning.

Keen to read the full piece? Here you go!

PS: FWIW, having personally worked with lithium since 2008, I could not agree more with Benchmark’s take.

Originally tweeted by Paola Rojas 🐝 (@paola_rojas) on June 16, 2022.