| A lithium mine site in Western Australia owned by Pilbara Minerals. Low lithium prices are pressuring margins for high-cost producers, which have taken to cost-cutting measures to reduce the blow to profitability. |
Rising supplies of lithium along with slowing growth in electric vehicle sales sent prices of the battery metal crashing in the past year, prompting lithium producers to cut costs, slow production and scale back expansion plans.
The lithium carbonate ex-works China battery price hit $13,425 per metric ton on Feb. 7, a whopping 83.1% drop from a 2022 high of $79,650/t on Nov. 30, S&P Global Market Intelligence data showed.
When prices jumped in 2022 as a global transition to EVs began in earnest, lithium producers increased output and investors poured money into new projects and expansions. Global lithium production in 2023 is expected to reach a record high of 999,353 metric tons when the data is finalized, according to S&P Global Commodity Insights. But EV sales slowed at the end of the year, and the glut of the metal combined with falling sales sent prices to the floor.
Faced with low prices, producers have taken to cost-cutting measures to reduce the expected blow to profitability, and several have cut back on expansions, even as they complete some projects,
"We are seeing a curtailment in nonessential capital expenditure from incumbent producers and an emphasis on operating cost improvement initiatives," Chris Williams, lithium analyst at Adamas Intelligence, said in an email. "[But] top-tier producers remain committed to existing brownfield expansion capacity."
EV sales boom
Lithium producers saw boom times ahead as they watched the EV market grow in 2020 and 2021. EV sales grew a meager 7.7% from 2018 to 2019, but 2020 excited producers and investors
Amid the frenzy, lithium supplies went into deficit in 2021 before recovering into a surplus of 40,000 metric tons of lithium carbonate equivalent in 2022, Market Intelligence data shows, but the market expectations still sent the price skyrocketing. Companies turned up the dial on production: 2023 lithium output was 26.6% higher than the previous year and 75.5% higher than in 2021.
The bubble quickly burst in 2023 "with the weakening of the global economy and slowdown in EV sales in Mainland China, along with the repeal of EV subsidies," Sabrin Chowdhury, head of commodities analysis at BMI, told Commodity Insights.
EV sales growth is expected to slow to 31.1% this year while new lithium supply continues to come online amid the start of delayed projects. The Sigma Lithium Corp.'s Grota do Cirilo mine in Brazil sent its first concentrate shipment in the first half of this year and Zijin Mining Group Co. Ltd.'s Xiangyuan mine in China declared commercial production in July.
The lithium surplus is expected to widen to 100,000 metric tons of LCE this year, according to Commodity Insights. Lithium production is forecast to rise to 1.36 million metric tons in 2024, a 35.7% increase from 2023. Analysts think the price will find its low this year.
"In 2024, we expect prices to form some form of cyclical bottom as the inventory buildups are relieved," Adamas' Williams said.
Feeling the burn
Current market prices are hitting lower-grade spodumene concentrate and lepidolite producers the hardest because they often face higher production costs than brine and tier 1 producers, Williams said.
"Concentrate producers can ramp up quick but are far more subject to price changes and are generally the first off when prices go too low," said Kevin Murphy, director for Commodity Insights' Metals and Mining Research.
Pilbara Minerals Ltd., an Australian spodumene producer, said it is unlikely to pay an interim dividend for the first half of fiscal year 2024 in order to preserve the company's balance sheet. Pilbara's revenue in the December quarter dropped 46% quarter over quarter to A$264 million, driven by the volatile price for lithium.
Producers of spodumene have been pricing their product above market and are now considering changing pricing settlement terms to stop buyers from turning to inventories, Alice Yu, a senior metals analyst at Commodity Insights, said in a November 2023 research report.
In January, IGO Ltd. shifted the offtake pricing model for spodumene coming from the world's largest lithium spodumene deposit, Greenbushes, a joint venture with Tianqi Lithium Corp. and Albemarle Corp. The mine will also reduce production in the second half of the year.
Producers are slowing output in an attempt to relieve an oversupplied market, analysts said. The first signals of production cuts came from Australia when Core Lithium Ltd. announced in January that it would halt mining operations at the Grants open pit.
Analysts expect Australian lithium miners to continue supply curtailments as near-term prices remain uncertain.
"Supply curtailment is a common response from miners and chemical processing plants when market conditions are not optimal, as is the case now," Federico Gay, principal analyst for lithium at Benchmark Mineral Intelligence, said in an interview.
Financing woes
As some miners cut production, investors in lithium projects are faced with deciding whether to continue or pause project development. Analysts agreed that projects may be delayed. Adamas' Williams expects top-tier producers to keep funding existing brownfield projects, while unfunded greenfield projects will be hit the hardest.
Albemarle will indefinitely defer spending on its proposed "mega-flex" lithium conversion facility project in South Carolina and instead prioritize permitting activities at its Kings Mountain lithium-spodumene mine in North Carolina.
Liontown Resources Ltd. said it still plans to start production at Kathleen Valley in Australia in mid-2024 but is reconsidering the planned ramp-up of the project to "preserve capital and reduce the near-term funding."
"For now, we expect to see more higher-cost and pure-play lithium producers exit the market or postpone their projects. Companies are likely to delay their lithium investment plans ... until a pickup in prices occurs," BMI's Chowdhury said in an email.
As lithium projects struggle to stay above water, analysts also expect M&A activity to increase as "major producers with positive cash flow try to find deals in the market while junior companies try to sell projects in a market where private capitals are scarcer than previous years," Benchmark's Gay said.
Gay and Chowdhury said lithium prices may start to recover at some point this year, while Commodity Insights' Yu still expects prices to "remain depressed and rangebound in the near term."