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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Lithium Prices Have Crashed Spectacularly, Here’s What Next

  • An influx of fresh lithium supply has spooked the markets.
  • After hitting an all-time high of CNY 595,000 per tonne in November 2022, lithium carbonate prices in China have sunk to a 13-month low of CNY 362,500 per tonne.
  • Rystad Energy: the global market deficit of lithium will shrink from 76,000 tonnes of lithium carbonate equivalent (LCE) in 2022 to around 20,000 to 30,000 tonnes of LCE in the current year.

Over the past few years, the lithium markets exploded as the electrification drive went into overdrive. EV makers like Tesla Inc. (NASDAQ:TSLA) have been scrambling to secure supplies amid rapid EV growth and tight lithium supplies, sending lithium carbonate prices up more than six-fold and spodumene up nearly tenfold in the space of a few years. But as the old adage in the commodity markets goes, the cure for high prices is high prices, or in more common parlance, what goes up must come down: lithium prices have crashed spectacularly over the past four months, reversing years of gains.

After hitting an all-time high of CNY 595,000 per tonne ($86,170 per tonne) in November 2022, lithium carbonate prices in China have sunk to a 13-month low of CNY 362,500 per tonne ($52,500 per tonne) in March 2023, good for a nearly 40% correction as a confluence of negative catalysts conspired to end lithium’s biggest rally ever.

First, a rare slowdown in EV demand in the pivotal Chinese market has taken the markets by surprise. According to the China Passenger Car Association (CPCA),  sales of new energy vehicles, including pure battery EVs and plug-in hybrids, fell 6.3% in January, a sharp contrast to a blistering 90% growth in 2022.

"New energy car sales in January didn't meet our expectation, with a rare year-on-year decline in a single month's sales," Cui Dongshu, secretary general of CPCA, has revealed in an online briefing on Wednesday. Dongshu has blamed the  Lunar New Year and the end of EV subsidies for the decline. Starting Jan. 1, 2023, Beijing no longer offers subsidies to buyers of electric vehicles, ending 13 years of the government offering subsidies to EV buyers to achieve price parity with internal combustion vehicles.

Second, news that China’s CATL, the world’s biggest manufacturer of li-ion batteries for EVs, has started offering discounts on its batteries has not sat well with the markets. About two weeks ago, Reuters reported that CATL had begun offering discounts to some Chinese automakers it supplies, which included an assumption that lithium carbonate prices would halve. CATL, which counts Tesla, NIO Inc. (NYSE:NIO), and Volkswagen AG (OTCPK:VWAGY) among its largest clients, is reportedly also offering targeted rebates. Related: Natural Gas: A Comprehensive Guide To The World's Most Crucial Fuel

But what has really spooked the markets has been an influx of fresh lithium supply, with looming supply from China, Australia and Chile likely to pull down prices even further, “Supply is coming on stream faster than you can say ‘boo’.Demand remains strong but prices have been unsustainable for some time now,” analyst Dylan Kelly of Ord Minnett has told Mining.com.

Source: Trading Economics

Brighter Long-Term Outlook

The bad news for the lithium bulls is that this selloff could get a lot worse.

Norwegian energy analyst and consultancy Rystad Energy has projections that the global market deficit of lithium will shrink from 76,000 tonnes of lithium carbonate equivalent (LCE) in 2022 to around 20,000 to 30,000 tonnes of LCE in the current year. Goldman Sachs has forecast that lithium carbonate supply will grow at a brisk 33% annual clip, outpacing demand which will only grow at 25% p.a. The mismatch between the two market forces will depress lithium carbonate prices even further with prices expected to sink to $34,000 a tonne in the next 12 months, from around $53,000 per tonne currently, good for another 36% decline.

The likely supply surge and downstream overcapacity are set to bring lithium prices down subsequently in the medium term,” GS said in a Feb. 23 note.

Thankfully, many analysts expect the slowdown in the lithium and EV markets to be a temporary blip.

Demand is still healthy, but battery and EV makers are currently destocking instead of placing new orders. The subdued spot demand therefore is weighing on sentiment and pressing down prices,” Susan Zou, Shanghai-based vice president at Rystad Energy.

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Meanwhile, lithium giant Albemarle Corp. (NYSE:ALB) has ascribed the lower car sales in China to temporary weakness due to the early Lunar New year but has predicted that China’s EV market will still expand a healthy 40% this year. 

Even better for EV enthusiasts, falling lithium carbonate prices is great news for the EV revolution. Battery costs are the most expensive component in an EV, and lower lithium carbonate prices are likely to ease a major cost pressure on automakers like Tesla. Last year, E Source estimated that battery cell prices will surge 22% from 2023 through 2026, peaking at $138 per kilowatt-hour thus reversing a multi-year trend whereby battery pack and EV costs have fallen consistently each year. Various analysts have estimated that EVs will achieve cost parity with ICE vehicles when battery costs fall to ~$100 per kilowatt-hour, which could happen in just a few years and mark a major win for the global clean energy revolution.

By Alex Kimani for Oilprice.com

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