There has been a lot of talk about the green energy transition and the specific commodities that will make it happen. Lithium has been heavily debated in this discussion and seems to be on the verge of translating “potential” into cold hard cash.
Western Australian is the dominant home of hard rock lithium projects, producing around 50% of the global lithium supply for use in lithium-ion batteries. These projects produce a spodumene concentrate that has approximately 6% lithium content. This concentrate is processed into lithium hydroxide for use in the battery market.
It appears that the 2023 financial year will be the year in which increased production meets sustained high lithium prices to drive surging cash generation. The current spot price of spodumene concentrate (6%, CIF China) is approximately US$5,000/t, up from a meagre US$400/t in early 2021.
The lithium players best positioned are those companies that are in production or well-advanced developers that can move into production within the next couple of years and capitalize on the high prices.
The big question is how sustainable is the current lithium price?
At one end, we have Goldman Sachs who called the party over saying the peak had been reached and the market would move into oversupply (in the medium-term at least). At the other end of the spectrum, we have the market feedback from lithium producers themselves who are reporting continued strong demand from purchasers and no sign of an emerging oversupply.
The answer will be driven by both the rate of electric vehicle (EV) penetration, as this will be a key driver of lithium-ion battery demand, and the rate at which new supply comes online. Consensus forecasts are for EV demand to lift from 6M vehicles in 2021 to 30-40M vehicles by 2030.
With the U.S. recently approving massive investment to support the energy transition, we now have the U.S., China and the European Union all pushing forward aggressively to decarbonize, with a clear short-term focus on replacing internal combustion engine vehicles with electric. We expect that the consensus estimates may prove to be low.
An important factor to consider is the current low rate of lithium production. Given the high demand forecasts for lithium, the necessary supply ramp up is huge. The International Energy Agency forecasts a lift in lithium carbonate equivalent (LCE) demand from less than 100,000t per year in 2021 to 450,000t in 2030, based under its “Announced Pledges” scenario or 780,000t based on its “Net Zero by 2050” scenario (note that 450,000 LCE is equivalent to about 3Mt spodumene (6%) concentrate). Volatile pricing is always likely in a market where demand is expected to grow by a factor of at least four within the next eight years.
Our approach has been to focus on the current producers, particularly those that can increase production capacity, and late-stage developers. In our view, these are the companies best placed to capitalize on the surging demand and strong pricing environment.
