China's lithium chemicals prices lack momentum for further increase

The latest auction price of Pilbara Minerals' spodumene and supply tightness in the domestic market is expected to keep Chinese lithium chemicals prices at elevated levels in the near term. However, prices are starting to lack momentum for a further increase as downstream consumers show less buying interest at current levels, market sources said.

Platts, part of S&P Global Commodity Insights, assessed battery grade lithium carbonate unchanged for the second straight day at Yuan 588,000/mt Nov. 21 on a delivered, duty-paid China basis, up 194% from a year earlier. The price, which has trended upward since May, reached a peak of Yuan 590,000/mt Nov. 11 -- the highest since Platts began assessing prices in Sept. 2018.

Tight supply, high feedstock cost to support prices

Pilbara Minerals Ltd's 12th spodumene auction received its highest-ever winning bid on Nov. 16 at $7,805/ton for a target grade of 5.5% lithium oxide, the company said in an announcement the same day.

The highest bid was 7.6% higher than Pilbara Minerals' previous auction on Oct. 18, underscoring a continued bullish sentiment for the lithium market despite prices having more than doubled since the start of the year, according to Platts assessments from S&P Global.

As the auction price is often used as a guidance for lithium prices going forward, market views for the near-term outlook will likely continue to strengthen, sources said.

The bid of $7,805/mt for spodumene is equivalent to the production cost of Yuan 582,000/mt for battery-grade lithium carbonate after factoring in 13% value-added tax and Yuan 30,000/mt of processing and refining fees.

Meanwhile, lepidolite, which is another alternative feedstock for lithium chemicals production with an average grade of 3.5%, used to be undervalued before the demand for lithium chemicals picked up. However, the narrative has since changed significantly, with grades lower than 1.5% being used and even lithium slag becoming attractive, said a Chinese source.

In addition, with output from domestic brine producers coming down in the upcoming winter, further support is expected for domestic lithium chemicals prices at a time when downstream demand remains strong, sources said.

The recent price drop on the Wuxi Stainless Steel Electronic Exchange Center was attributed to talks of output cuts amid Chinese leading battery makers. Sources expected a limited impact on the spot market due to strong fundamentals.

Expanding capacity to ease prices, but risks remain

Sources expected that Chinese lithium prices could fall back to a reasonable range in 2023 on growing mine capacity and lower production costs; however, risks remain as Chinese producers cope with growing inflation and obstacles to secure seaborne raw materials.

Soaring prices and tight upstream supply have sparked a flurry of investments in mines over the past two years. This is not limited to existing industry players like mining companies and vehicle makers, with other industries also wanting to get a cut of the increasingly lucrative market.

As the investment and exploration of lithium mines continue to accelerate, global lithium resources could increase significantly in the second half of 2023, which will reduce the production cost for lithium chemicals to some extent.

Sources expect the increasing capacity of spodumene, lepidolite and brine to ease the supply tightness of raw materials, combined with the supplementary supply from recycled batteries.

However, the market could still be looking at a deficit of 605,000 tons of LCE by 2030 if capital investment falls short of the required $37.8 billion, according to data from S&P Global.

Meanwhile, skyrocketing lithium prices has expedited the development of sodium-ion battery and hydrogen cells, which might be a suitable alternative for lithium-ion battery in some markets such as energy storage, freeing up more lithium for the rapidly expanding EV sector.

On the refining side, lithium chemical producers worldwide are also expanding their capacity to meet demand. However, upstream mining remains the bottleneck, as mining projects typically take far longer to start producing compared with salt refining, which could lead to refining overcapacity instead.

Electric vehicle sales growth may slow in 2023

Chinese EV sales continue to refresh monthly highs, with S&P Global forecasting total sales to reach 6.71 million units in 2022. However, the growth might slow down in the coming year after subsidies for new energy vehicles, or NEVs, are removed and oil prices come down, sources said.

NEV sales accounted for 28.5% of China's total vehicle sales in October, which stayed above 20% for eight consecutive months, the latest data released by China Association of Automobile Manufacturers (CAAM) showed.

With battery raw material costs at an all-time high, consumers could balk at paying more for an EV against the backdrop of rising inflation, with most sources expecting Q2-Q3 to be a critical period for the sector.

"If EV sales are worse than expected, then we could see a bigger impact on lithium prices," said a Chinese producer.

While sources agreed that the push for electrification would continue to gain traction, slower growth would pile the pressure on EV makers as they continue to strive for market share against headwinds of weakening policy support and record-high raw material costs.