TRADE REVIEW: Asian lithium prices to remain weak in Q3 on oversupply, EV tariffs

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, nickel 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 China are likely to remain rangebound at Yuan 80,000-90,000/mt (($11,022-$12,799) in the first half of the third quarter, while prices in North Asia are likely to remain soft over the same period, amid a seasonal lull during the summer months and expectations of significant pressure from ample supply.

There is, however, potential for a turnaround in the second half of Q3, which is the traditional peak season for lithium demand after summer, sources said.

China's electric vehicle sales had seen an increase in Q2 after the country subsidized the replacement of polluting vehicles with EVs or highly fuel-efficient cars.

However, market sources said that any near-term optimism will have to take into account high import tariffs announced by the US and the EU on Chinese EVs in May and July, respectively, which may reduce sales in these regions.

Chinese lithium prices decline in Q2

Chinese lithium prices started off Q2 rangebound at Yuan 100,000-114,000/mt in April. The Platts lithium carbonate prices hit a peak of Yuan 114,000/mt on April 29, driven by a mid-day spike to Yuan 115,900/mt on the Guangzhou Futures Exchange.

However, a downtrend began at the start of May after China's domestic restocking concluded ahead of Labor Day. Prices then hit a three-year low of Yuan 80,000-90,000/mt in June amid tepid downstream spot demand and fluctuating futures contract prices.

Orders from battery makers for nickel manganese cobalt (NMC) and lithium iron phosphate (LFP) cathode materials also fell over the summer months, sources said. Larger downstream consumers also relied more on term contracts than spot purchases to maintain production levels, limiting additional spot buying.

The second quarter also saw supply pressure from more lithium projects coming online and higher salt lake production levels in China due to warm weather.

China's lithium salt output rose nearly 30% on the year over January-May, while lithium carbonate imports rose 43.7% and hydroxide inflows rose 185.5% over the same period, all of which further lowered prices.

Platts last assessed lithium carbonate and hydroxide on a DDP China basis at Yuan 85,500/mt and Yuan 79,000/mt July 19, down 22.3% and 21%, respectively, from the beginning of Q2, showed S&P Global Commodity Insights data.

Muted Asian seaborne spot demand

The lithium spot market saw limited liquidity in Q2 amid limited demand from South Korea and Japan, whose requirements had been met by long-term contracts.

South Korea's lithium oxide and hydroxide imports fell 20.3% on the year over January-May, customs data showed. The decline in South Korea's imports and spot demand came amid high battery inventory levels due to a slowdown in the international EV market.

"Koreans do not need to buy spot volumes. Even if prices are low, they may not buy because they can just continue their long-term contracts," said a Chinese producer.

Japanese battery makers' monthly and yearly demand and supply for lithium chemicals was also heard to be stable.

Platts assessed both battery-grade lithium carbonate and hydroxide on a CIF North Asia basis at $12,500/mt July 19, down 12.9% and 10.7%, respectively, from the start of the quarter.

NEV sales, import tariffs

The lithium market is also likely to be pressured in Q3 by higher import duties on Chinese electric vehicles in the US and EU. This is despite EV sales in China being better than expected in June amid new model launches, discounts and trade-in policies.

China's domestic sales of new energy vehicles reached 1.05 million units in June, up 9.8% month on month, accounting for 41.1% of the country's total vehicle sales. The domestic sales of NEVs totaled 4.93 million units over January-June, up 32% year on year.

However, sales could decline going ahead with the US raising import tariffs on China-made EVs from 25% to 100% starting August. The European Commission has also imposed provisional countervailing duties of up to 47.6% on imports of battery electric vehicles from China.

Spodumene pressured by weaker lithium

Upstream, spodumene prices started Q2 around $1,100/mt, and rose to $1,200/mt in late-April and mid-May before gradually declining and ending the quarter slightly below $1,000/mt.

Theoretical spot margin calculations based on Platts assessments indicate that refiner margins had remained unfavorable despite the fall in spot spodumene prices. The calculations do not consider the necessary one-to-two-month lead time for delivery and conversion to salts.

In June, the cost of producing spodumene consistently exceeded 100% of the lithium carbonate price, and led to negative margins to produce lithium carbonate from spodumene in China due to low lithium salt spot prices. As a result, there was limited interest for spodumene among lithium converters in Q2.

Market sources said that spodumene prices would have to fall under $800/mt for favorable margins in Q3.

"A prolonged period of low lithium carbonate prices is likely to pressure spodumene prices and trigger a renewed wave of mine supply cuts," said Alice Yu, principal analyst at Commodity Insights.

Platts last assessed spodumene at $920/mt FOB Australia July 19, down 20% since the start of Q2.