14 Apr 2023 | 05:10 UTC

TRADE REVIEW: Lithium prices to be pressured in Q2 by low demand, higher feedstock supply

Highlights

China sees lower EV purchases after COVID-19 surge

Four greenfield projects to be commissioned in first half

Shift away from MNC to cheaper LFP batteries to continue

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This report is part of the S&P Global Commodity Insights' Metals Trade Review series, where we dig through datasets and digest some of the key trends in iron ore, metallurgical coal, copper, alumina, cobalt, lithium, and steel and scrap. We also explore what the next few months could bring, from supply and demand shifts, to new arbitrages, and to quality spread fluctuations.

Lithium prices in Asia are likely to see continued pressure in the second quarter on weak demand from cathode and battery makers and expectations of higher upstream production capacity globally, after a two-year bull run ended in Q1 amid rising COVID-19 cases and macroeconomic disruptions in key producer China.

China had seen sales of electric vehicles rise 93% year on year to 6.89 million units in 2022, according to data from China Association of Automobile Manufacturers. However, passenger plug-in electric vehicle sales fell 55.8% on the month to 408,000 units in January.

This came after China's EV subsidies were terminated at the end of 2022 and sources are now skeptical about whether the country will achieve CAAM's forecast of 9 million units in EV sales in 2023.

The country is also likely to continue its shift away from nickel-manganese-cobalt (NMC) batteries to the cheaper lithium iron phosphate (LFP) batteries in Q2, a move that was expedited by the termination of the subsidies.

The end of state support changed the price dynamic of raw materials lithium carbonate and lithium hydroxide, with the latter used in nickel-rich NMC batteries. The share of NMC batteries in Chinese production fell to 34.8% in January from 56.8% in January 2021, showed data from S&P Global Commodity Insights.

Despite LFP batteries being traditionally cheaper as they do not require expensive raw materials such as nickel or cobalt, the cost competitiveness of LFP batteries has fallen due to surging lithium prices over the past two years. In December 2022, LFP batteries were only 41% cheaper than NMC622 on a dollar-per-kilowatt-hour basis, down from 61% a year prior.

Market slows after 'zero-COVID'

The outlook for demand from China in Q2 remains bleak amid concerns of a further escalation in COVID-19 cases and expectations of low buying interest among end-users.

Sources said they expect spot demand to return after consumers finish destocking in Q1, but this would depend on the recovery in downstream demand in Q2.

Participants stayed away from the market in Q1 after China's termination of the 'zero-COVID' policy led to a surge in cases. The weakened macroeconomic environment that followed meant that consumers were less willing to make expensive purchases such as EVs, leading to a decline in lithium prices.

Platts assessed Chinese lithium carbonate and lithium hydroxide at Yuan 220,000/mt DDP China and Yuan 285,000/mt DDP China March 31, down 56.9% and 42.5%, respectively, year on year, showed S&P Global data.

The Yuan 380,000/mt drop in the price of lithium carbonate from the peak of Yuan 600,000/mt in November 2022 wiped out 15 months of gains, placing the market back at December 2021 levels.

Liquidity levels in the domestic market also fell significantly over December 2022-January, during the peak of China's most recent COVID-19 outbreak.

Global market uncertainty

There are now mixed indications for Chinese prices in Q2, with some expecting lithium salt prices to fall below Yuan 100,000/mt while others believe it will be rangebound at Yuan 200,000/mt.

The global market is also expected to reflect some of this uncertainty as prices that initially held firm against Chinese declines began to slip mid-January.

Platts assessed lithium carbonate and lithium hydroxide CIF North Asia prices at $56,500/mt and $62,500/mt March 31, down 24.6% and 23.1%, respectively, from the start of 2023, showed S&P Global data.

International lithium carbonate prices continue to trade at a slight premium over China's current domestic prices, with import parity levels standing at Yuan 220,780/mt March 31.

When Chinese lithium prices declined, participants who usually buy from the international market chose to hold off on purchases expecting global prices to follow suit, market sources said. Many South Korean and Japanese buyers also had limited spot demand as many operated under long-term contracts.

"Some [consumers] have been trying to buy at China's domestic prices, but we're also not in a position to offer because prices are going down every day," said a Chinese lithium converter who reported zero export trades in Q1.

Higher raw material supply

Upstream, spodumene supply is likely to increase with four greenfield lithium projects expected to be commissioned in the year's first half, which will add 132,000 mt/year of lithium carbonate equivalent at full capacity, said Alice Yu, senior analyst from Metals and Mining Research at S&P Global.

"These commissioned projects will further weigh on prices during a period of relatively weak demand," she added.

A total of seven lithium projects have been commissioned across the globe for 2023, five of which were delayed from 2022. They are the Rincon, Cauchari-Olaroz, Tres Quebradas and Sal de Vida projects in Argentina; Grota do Cirilo in Brazil; Finniss in Australia; and Zhabuye in China.

Sources said falling lithium prices in Q1 have already significantly reduced spodumene demand, and the scheduled new capacities are likely to further this trend.

"Almost everyone I asked said that they didn't want to buy [spodumene]. There's a lot of African material in China now, but no interest at all, not even on direct shipping ore," said a Chinese trader.