The lithium industry has experienced a significant downturn in recent years due to a surge in supply outpacing weaker-than-anticipated demand for electric vehicle batteries. This isn't the first-time lithium has faced such a boom and subsequent bust; a similar cycle occurred in 2016-2017. However, unlike previous instances, there is little optimism for a rapid recovery this time around.
In the short-term, prices are expected to remain low as the market absorbs excess supply. Looking further ahead, the outlook improves as governments push for increased adoption of electric vehicles. Despite this, analysts from BMI, a Fitch Solutions company, do not foresee a return to the high prices seen in 2022 within the next decade.
Nevertheless, it would be premature to dismiss either lithium or the electric vehicle sector altogether. The current price decline has been influenced by unique factors affecting both supply and demand.
Too Much Supply
Lithium producers consider their product to be a customized chemical tailored precisely to meet the specifications of battery manufacturers rather than a generic commodity. However, the price dynamics of lithium resemble those of any other commodity, characterized by periods of high prices prompting increased production, followed by corrections during periods of low prices. Currently, producers are scaling back output and delaying expansion plans in response to the new, lower price environment.
A less-discussed aspect of the current oversupply is the rise in artisanal mining (ASM) across Africa, notably in Nigeria and Zimbabwe. In the first quarter of this year, African shipments of ore and low-grade concentrates accounted for a significant portion of China's total lithium imports, according to CRU.
Chinese entities are actively involved in formalizing ASM supply chains, particularly in regions previously focused on tin and tantalum mining. However, ASM operations are highly sensitive to price fluctuations. The recent increase in independent production began when spodumene ore prices were above $6,000 per ton in early 2023 but have since dropped to around $1,000 per ton, making many deposits economically unviable except for the most lucrative ones.
Further formalization of ASM may happen, but it's crucial to heed the lessons from the cobalt market: ASM has the potential to rapidly become a substantial and unpredictable part of the total supply.
Too Little Demand
Lithium prices have been under pressure due to reduced expectations for electric vehicle (EV) sales, particularly as the Chinese market matures and momentum in the Western markets slows down. While the EV revolution continues, there has been a shift in the types of vehicles being sold. In China, plug-in hybrid sales surged by 75% year-on-year in the first quarter, whereas pure electric vehicle sales saw a more modest increase of 15%.
This shift is significant for the broader energy transition but presents challenges for lithium demand, as many hybrids utilize nickel hydride batteries that do not require lithium, according to analysts.
Hybrids, once seen as a transitional technology on the path from internal combustion engines to fully electric vehicles, are gaining popularity among consumers concerned about charging infrastructure and the higher costs associated with pure battery electric vehicles.
Governments are adjusting their policies in response to these trends. For instance, the Biden administration has adjusted its goal of converting two-thirds of new vehicles to battery electric by 2032, allowing automakers to increase production of hybrid vehicles instead.
Compounding lithium's price weakness has been a downgrade in expectations for EV sales as the Chinese market develops and the Western market loses some of its recent momentum.
Full Charge Ahead
The transition in automotive energy is still progressing but has not met the optimistic forecasts from a few years ago. Currently, there is an oversupply of lithium and battery production capacity compared to the demand for electric vehicles.
The pace of this slowdown could easily reverse with two critical factors playing key roles. Firstly, the expansion of EV charging infrastructure, an area that has seen less investment compared to battery manufacturing, will be crucial. Consumers in Europe and the United States are opting for hybrids due to concerns about range and will likely continue until more charging stations are available.
Secondly, price remains a significant factor, as electric vehicles remain more expensive than traditional cars outside of China. Just as high lithium prices benefited producers but posed challenges for battery-makers, current low prices are unfavorable for the lithium sector but advantageous for consumers, leading to lower battery costs.
According to the International Energy Agency, lithium-ion battery pack prices increased by 7% between 2021 and 2022, breaking a long trend of declining prices. High lithium prices coincided with bullish markets for other battery materials like cobalt, nickel, and graphite. Now, as lithium and other material prices decrease, battery prices are also dropping.
Benchmark Mineral Intelligence reports that the average price of Asian nickel-cobalt-manganese battery cells fell to $90 per kilowatt hour in May, the lowest since 2021 and significantly lower than the peak of $166 in March 2022.
Despite the current low-price environment affecting lithium, conditions are being set for a future upturn. While it may not reach the heights seen in 2022, lithium's history of price volatility suggests that significant shifts could still occur.
Hedging Against Market Risks
In the current lithium market conditions characterized by oversupply and fluctuating demand, diversifying supply sources is crucial for mitigating exposure to regional disruptions and price fluctuations. Long-term contracts with reliable suppliers can provide stability in pricing and ensure a consistent lithium supply.
Financial hedging instruments like futures contracts and options offer opportunities to lock in favorable prices and manage market uncertainty. Monitoring market trends and staying informed about shifts in demand, regulatory developments, and technological advancements will help anticipate risks and capitalize on emerging opportunities.
Additionally, diversifying product offerings and investing in efficiency-enhancing technologies can optimize cost structures and reduce dependency on specific lithium price fluctuations.
For more information on how to hedge against lithium price fluctuations, read Trading Lithium Futures on SGX
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