Lithium output cuts raise prospect of supply deficit

Output cuts at lithium producers in response to low prices and Covid-19-related disruptions to the supply chain could create a structural deficit as demand for electric vehicles (EVs) rises in the coming years.

US-based lithium producer Albemarle, which has capacity in the US and Chile, will idle its Silver Peak lithium mine in Nevada and its Kings Mountain lithium hydroxide plant in North Carolina from 1 September until early 2021. The move comes in response to a fall in demand from customers during coronavirus lockdowns. The plant produces 4,000-5,000 t/yr of lithium hydroxide, company president Eric Norris said last week, adding that when it resumes output will depend on market conditions.

Inventory in the lithium supply chain has reached in excess of five months above typical levels, almost all of which is in the battery industry rather than the industrial sector, Norris said. Material that was shipped to China for processing in prior quarters built up as processors halted operations during lockdowns. The global pandemic has pushed Albemarle's expected lithium growth out by at least one year, and the third quarter is expected to see continued low automotive production, higher inventory in the battery supply chain and reduced demand for lithium in the glass and ceramics markets, said chief financial officer Scott Tozier.

US-based Livent expects its lithium carbonate production in Argentina to be flat on the year in 2020. But it will adjust its lithium hydroxide production based on demand while minimising its purchases of additional carbonate from third-party suppliers and its inventory build, said Gilberto Antoniazzi, Livent's chief financial officer, in the company's quarterly earnings call.

In Australia, lithium spodumene miner Galaxy Resources has reduced its output guidance for 2020, expecting to process 900,000-1mn t of ore compared with 1.7mn t in 2019. And China based Tianqi lithium has delayed the first phase of commissioning of its Kwinana lithium hydroxide facility in Western Australia.

The combination of a strong long-term outlook for EV demand growth, coronavirus-related disruptions to mining and processing, and lower lithium prices is creating the possibility of a structural supply deficit in the coming years.

Lithium prices have fallen steadily in the past two years on oversupply as production has ramped up from new producers in China and Australia, which overtook Chile as the world's largest supplier.

Spot prices for 99.5pc grade lithium carbonate on an ex-works China basis have dropped to Yn39,000-44,000/t ($5,598-6,315/t), from Yn160,000-170,000/t at the end of 2017, when the market started to decline, Argus data show. In the international market, prices for 56.5pc grade lithium hydroxide have fallen to $8.00-9.50/kg from $17.00-20.00/kg in August 2018.

Some smaller reported transactions for lithium in China have been at prices around the cost of production for the lowest-cost producers, said Paul Graves, Livent's president and chief executive.

The drop in prices has led to the postponement or cancellation of new lithium projects and capacity expansions that would be needed to meet anticipated demand. Demand for lithium for EV batteries is expected to reach new highs in the coming years, as automotive producers around the world roll out new models and governments set policies for the electrification of transport.

"[The] financing to support growth in lithium supply is virtually non-existent from today's capital markets," Graves said. "As lithium demand picks up when the global business environment normalises and electric vehicle production accelerates, there will need to be a corresponding increase in lithium supply well beyond existing capacity."

Livent is being approached by automotive manufacturers to increase lithium production capacity to meet demand over the next five years, to locate capacity closer to their consumer markets, and diversify production away from China, Graves said. The bulk of lithium hydroxide refining capacity is in China, with small volumes in the US, Chile and Russia. But with automotive producers building out global supply chains for EVs, they are looking to secure supply from locations close to their manufacturing facilities.

"It is increasingly clear that the current lithium industry pricing environment, the significant capital needs relative to available capital, and the way lithium supply chains have developed so far, will not be sufficient for what the automotive industry as a whole will need if its plans for EVs are to be realised," Graves said.

By Nicole Willing