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Article by Financial Times
Lithium producer Livent is looking to acquire resources in Argentina and Australia to expand its access to raw materials to meet rising demand from electric cars, chief executive Paul Graves said.
The company, which was spun out of its parent FMC and listed on the New York Stock Exchange last year, said it was looking at low cost high quality assets in Argentina and Australia.
“We’re looking now. We’re talking to people now,” Mr Graves, a former M&A banker at Goldman Sachs, said. “A good resource is all we care about.”
Livent is one of the key suppliers of lithium to the electric car industry, and produces lithium hydroxide, a type of lithium used by Tesla.
The company currently only owns one lithium resource, the Salar del Hombre Muerto in Argentina, where it extracts lithium from brine 4,000 meters above sea level in the Andes.
Mr Graves said it was looking to acquire another brine resource in Argentina and also wanted to buy a lithium mine in Australia, where the chemical is extracted from hard-rock.
Livent is also looking at investing in new extraction technology that would enable extraction of lithium from brine deposits that have not been successful due to unwanted byproducts.
One area for focus was how to extract the lithium contained in brine that comes out of the ground during the extraction of shale oil in the US, he said.
Mr Graves said despite price weakness in the broader lithium market, prices for its lithium hydroxide remained “relatively stable.”
Around 80 per cent of its customers were paying the same price or higher than they did in 2018, he said. Prices for lithium carbonate, a product that is more widely used by battery makers, have fallen by 50 per cent from last year in China, according to Fastmarkets.
While a number of new lithium hydroxide projects are being developed, Mr Graves said there won’t be a “wave of oversupply.” “I think there will be a wave of supply but it won’t be oversupply. What people miss is there’s just as big a wave of demand coming,” he said.
In February Livent said that Chinese customers have been unwilling to sign new contracts due to uncertainty about market conditions.
But Mr Graves said while Chinese customers remained cautious, the market outside China was unaffected. The company was seeing rising demand from battery customers in Japan and Korea, he said.
“China is an unusual beast in this market,” Mr Graves said. “But by 2025, China won’t be the largest market for lithium. It will be Japan. While China is going to be important, it’s not going to be the be all and end all in our industry.”
Mr Graves said a cut in China’s EV subsidy this week won’t damp demand for electric cars in the country, the world’s largest electric car market, since it will benefit the roll-out of charging infrastructure.
Beijing said on Tuesday that the subsidy for electric vehicles with a range greater than 400 kilometres would be cut by half to a maximum of RMB 25,000 per vehicle.
“We are seeing a shift in the incentive policy towards charging infrastructure, so while we won’t get this direct near-term boost in demand in EVs from the change in policy, I think we will get a very favourable long-term benefit from investment in infrastructure,” Mr Graves said.
The commodities market endured yet another annus horribilis, with just four commodities—natural gas, uranium, cocoa and wheat—recording any uptick at all. Last year’s 12 percent slide by the Bloomberg Commodity Index–spurred by 20 percent-plus declines by industrial bellwethers like West Texas Intermediate crude, steel and platinum—came in the wake of two years of modest gains.
So far, there is no clear data or evidence that that the lithium demand narrative is about to slowdown, let alone reverse on the contrary, certain emerging trends in the industry suggest just the opposite
Viewed against that kind of backdrop, lithium’s 50 percent correction that snapped a multi-year winning streak appears less vicious. It’s important to remember that prior to the crash, lithium had enjoyed a meteoric rise with prices doubling since the beginning of 2016 and nearly quadrupling over the past decade. The fact that much of the rally coincided with a sharp rise in the value of the U.S. dollar makes it all the more remarkable.
Investing in the commodity market can be a roller-coaster ride; what with the incessant boom-and-bust cycles driven by the ebb and flow in infrastructural spending, production ramps/cutbacks and stockpiling/destocking supplies. And just like other financial markets, trader sentiment plays a big role in determining trajectories.
Unfortunately, it’s the latter scenario that took center-stage during last year’s lithium crash. A furor around anticipated new supply especially from China’s new hard-rock projects and Chilean brine mines got out whack and derailed the market.
Tsunami of Oversupply?
The situation was not helped by Wall Street punters sounding the alarm over the dangers of oversupply …
Shares of major lithium producers and explorers including Sociedad Quimica y Minera de Chile (NYSE:SQM), Albemarle Corp. (NYSE:ALB) and Orocobre Ltd (ASX:ORE) received a severe hammering in March after Morgan Stanley forecast that Chilean low cost brine producers could add as much as 200kt per year by 2025, while expansion of China’s and Australia’s hard-rock mines could pump in another half a million metric tonnes over the timeframe. That’s certainly a massive production ramp-up considering that global production in 2017 totaled just over 200kt.
In August, Macquarie Research provided the final straw after chiming in with a warning that the market was “sleepwalking into a tsunami of oversupply.”
The report put the final nail in the coffin of the decade-long lithium rally– Fastmarkets reckons that prices for battery-grade lithium carbonate in China, by far the world’s largest consumer of high-grade lithium carbonate, tumbled 50.31 percent last year to 75,000-83,000 ($10,885-12,046) yuan per tonne from 158,000-160,000 ($22,932-23,222) yuan per tonne the previous year, as demand waned.
But maybe the bear camp rushed their fences this time…
While it’s undeniable that the carnage managed to exceed even Morgan Stanley’s decidedly pessimistic outlook for global lithium prices to drop 45 percent by 2021, the fundamentals suggest that the selloff was greatly overdone and such low prices cannot be justified by simple market forces of supply and demand.
According to London-based Benchmark Minerals Intelligence senior analyst Andrew Miller, the disconnect between lithium prices and the demand side of the equation has never been bigger.
A cross-section of materials experts have raised eyebrows at the negative assessment, criticizing the investment analysts for underestimating the rise in lithium demand and the complex nature of lithium mining and production ramps. According to them, both MS and Macquarie failed to account for just how big the gap between supply forecast and actual production can be.
And, they might be spot on.
Supply expansions in 2018 came in much lower than predicted and the tsunami of oversupply forecast by the likes of Macquarie Research proved to be little more than changing tides in the lithium supply chain.
A good case in point is Brisbane-based Orocobre, which has become the poster child for just how challenging new brine mining can be. The company’s Salar de Olaroz project in Argentina took seven years to hit its stride but still came up short of production targets. Meanwhile, run-ins with the courts and regulators coupled with mutual accusations of license violations facing Chile’s lithium giants SQM and Albemarle at their Atacama brine projects further reinforce this point.
The screenshot below from Orocobre’s investor slide presentation is a sobering reminder to this reality.
In terms of feedstock supply, SQM and Albemarle had laid out plans for increased production rates. But as is often the case with brine evaporation, the process has been hindered by seemingly endless production delays. SQM hit technical obstacles at its new brine conversion facilities that delayed its target capacity of 70,000 tpa LCE by end of 2018 while Albemarle continues to struggle to achieve full capacity at La Negra II.
The situation has not been much better in China—the ultimate lynchpin to the lithium bear thesis. Many Chinese brine producers in the Qinghai region had outlined plans to triple or quadruple capacities over the coming 3-4 years. A visit by Benchmark Minerals to these operations, however, has painted a dire picture—the technical challenges related to high magnesium concentrations in the region are nowhere near being comprehensively overcome. Across Qinghai’s 10 producers, only an additional 5,000-10,000 tonnes of lithium product found its way to the market, majority of which failed to reach technical grade specifications. This, in effect, means that much of what came online from the region was either reprocessed thus adding to costs or converted to lithium hydroxide in a bid to meet growing demand for nickel-rich cathode technologies.
Although tight credit in China forced some lithium buyers to destock and contributed to the glut, the predicted huge oversupply failed to materialize. Around mid-September, analysts at CRU estimated lithium surplus for 2018 at a relatively mild 22,000 tonnes against a demand of 277,000 tonnes.’
2019: A transition year
So far, there is no clear data or evidence that that the lithium demand narrative is about to slowdown, let alone reverse. On the contrary, certain emerging trends in the industry suggest just the opposite.
The biggest near-term driver for lithium demand is the NCM trend. The shift towards cathodes that use huge amounts of lithium hydroxide is already underway, something that is expected to trigger a huge NCM (nickel-cobalt-manganese) ramp up. Benchmark Minerals estimates that 44 percent of mega-and-giga-factories will use lithium as a raw material by 2028 translating into 534,000 tonnes of additional demand.
That projection seems to resonate with Elon Musk’s ambitious target to build 20 gigafactories across the globe over the next decade. Miller sees 2019 as the tipping point where demand will eventually outstrip supply starting 2020.
Meanwhile, Roskill has predicted that the shift to higher-nickel-cathode materials will push many lithium producers to favor production of lithium hydroxide over lithium carbonate thus taking some pressure off the lithium carbonate supply side. The firm has forecast lithium demand to expand by a brisk 21 percent annual clip between 2018 and 2025 with demand expected to grow 13.5 percent in the current year.
But, of course, no lithium bull thesis would be complete without the EV angle.
Currently, the EV market accounts for about 47 percent of global lithium demand. That, however, is expected to drastically change as EV penetration rates coupled with the ongoing trend of electric vehicles using larger battery packs that yield longer ranges leading to electric mobility gobbling up 83 percent of lithium supply a by 2027.
Fastmarkets has predicted EV penetration to hit 15 percent by 2025 from 2 percent currently. EV demand has actually been beating estimates and is constantly being revised upwards to reflect this. The EV explosion is expected to drive a nearly six-fold increase in lithium demand for the forecast period.
Key lithium trends to watch in 2019 and beyond
- Lithium carbonate prices will steady in 2019 before picking up steam starting 2020
- Lithium hydroxide prices could soften a little bit after remaining resilient in 2018
- China will become less important as a global price trend driver as demand rapidly builds up in other key markets
Miller advises investors to keep an eye on new spodumene production, particularly how quickly it can be integrated into the chemical and converter supply chain and turned into either lithium carbonate or hydroxide. A slower ramp is likely to lead to supply constraints and raise prices and vice-versa.
Plant set to boost local jobs and supply growing global demand for lithium, which is used in renewable energy storage
Earthworks for a new lithium hydroxide factory in Western Australia are expected to begin this month after the $1bn project received federal environmental approval.
The plant owned by the world’s largest lithium producer, the US chemical company Albemarle, was approved by the WA government in October and is estimated to create up to 500 jobs in construction, with another 100 to 500 operational jobs once it is operational.
Australia’s trade minister, Simon Birmingham, said the plant would provide a much-needed local jobs boost and supply a growing global demand for lithium, which is used in renewable energy storage.
“This is a welcome investment and vote of confidence in our local lithium industry that will help attract further investment into the future,” Birmingham said.
Albemarle announced on Thursday that earthworks at the site at Kemerton Strategic Industrial Estate, just north of Bunbury, were on track to begin soon.
“Achieving this milestone underscores our commitment and confidence in developing LiOH [lithium hydroxide] operations and in our overall strategy to drive significant shareholder value and meet our customers’ demands,” said Eric Norris, the president of Albemarle’s lithium division.
The plant will process spodumene ore from the Greenbushes lithium mine, about 90km south of the industrial estate, and produce 60,000 tonnes of lithium hydroxide annually with capacity to expand to 100,000 tonnes.
It will also produce a byproduct of up to 200,000 tonnes of sodium sulfate, and a million tonnes of tailings per annum.
The company has been ordered to identify a new breeding and foraging habitat for WA’s three threatened black cockatoo species – Carnaby’s cockatoo, Forest red-tailed cockatoo, and Baudin’s black cockatoo – to offset habitat lost by clearing the 89ha plant site, including 54ha of coastal plain vegetation that is home to a number of threatened native orchids.
The director of the Conservation Council of Western Australia, Piers Verstegen, said the environmental impacts of the project were “manageable”.
“We think on the whole it’s a positive development for the south-west and one that could provide an alternative source of employment to the coal-based jobs in Collie,” Verstegen said.
Collie, about 70km east of Bunbury, is home to four of WA’s five coal-fired power stations, fed by two open-cut coalmines.
The Albemarle plan will run on gas, but Verstegen said he hoped the company would look into running it on renewable power.
WA is the world’s largest producer of lithium, and the plant at Kemerton is the second significant lithium hydroxide manufacturing plant approved in the state since 2016.
The state established a task force aimed at promoting the lithium industry last year, and the premier, Mark McGowan, met with the directors of Albemarle on a trip to Washington DC in February.