We expect that demand for battery raw materials this year is going to be derailed to a certain extent due to the fallout from the coronavirus. That’s not going to impact the longer-term trajectory of the battery industry, but it will impact the shape of that demand escalation particularly through 2020 and likely into 2021.
From a raw materials standpoint — which differs across different geographies and parts of the market — operations haven’t been impacted severely enough to predict a material deficit in terms of supply. The biggest issue at the moment is how quickly operations can be ramped up given that it’s likely to be a continued low-price environment across battery raw materials. This could make it incredibly difficult to fund and develop new resources in the timeframes that are going to be needed over the next three to four years.
A low-price environment is already in place after the fall-off in pricing during 2018 and 2019. Coming into this year, a lot of higher-cost operations had already come offline as many new spodumene operations were struggling under the operations on the market. This environment will put continued pressure on those projects and likely force more of them to remain closed for a longer period of time.
All of this will ultimately impact the lithium market balance due to the backlog in supply at the tail-end of 2019. We were expecting that backlog to be worked through by the middle of this year, but it looks likely that it will linger in the market for longer because converters in China that were expected to ramp up have in fact suspended operations. It’s also a tricky situation for Australian spodumene suppliers who will have to maintain some production and cashflow to remain in business. This means we will continue to see shipments from those new spodumene operations even though there is not huge demand growth in the Chinese market this year.
For lithium, we expect excess supplies to continue through 2020. Nevertheless, oversupply will decrease from 2019 levels due to more conservative production and expansion strategies from existing producers. In the medium term, the supply surplus is expected to reduce through to 2022, with the market set to move into a structural deficit from 2023 onwards.
The evolution of China’s role in the flake graphite market has seen them move from being a producer and exporter of low value-added products to a producer of higher domestic value-added goods. Flake graphite, more than ever before, is staying within China, and as a result requiring more material from abroad to complete development of products. China is developing its own downstream domestic graphite industry in response to its new value-added capacity. It has also been keen to maintain a dominant position in the graphite market despite the development of new resources elsewhere in the world.
With the ramp-up of Chinese flake graphite operations following the period of COVID-19 lockdown in Q1 (which is typically when production is offline in China), we don’t see too much material impact on the targets China had set for their production in 2020. However, we’re likely to see an overhang of flake graphite supply in the market during this year, particularly if battery demand doesn’t grow at the rate that was expected. More importantly, some of those traditional industrial end markets could fare badly over the coming 12-18 months due to the wider macro environment. That will increase the oversupply in the market through 2020 and into 2021 unless there are significant cutbacks in Chinese production.
The coronavirus has not yet had a huge impact on the supply side of the cobalt market at a mining level. However, the most important thing to look at is the distribution of the raw material from the DRC and the supply chains out of the DRC that allow the material to be refined and make its way into the battery supply chain. Over the past few years, the cobalt market has shown that it’s flexible to changes in demand and we are likely to see more cutbacks in supply.
We expect the cobalt market to be in oversupply through 2020 and into 2021, but it’s looking slightly more balanced than other raw materials because of its flexibility of supply. In the short-term, it’s a logistical issue in getting material out of the DRC. In terms of our forecast numbers for this year, the cobalt market will likely respond to demand drop-offs by lowering output from some of the major producers in the DRC, as well as other parts of the world. We expect this surplus to continue to decrease through to 2022, at which point we are forecasting that a structural deficit will emerge.
Where we’re expecting to see most disruption in the nickel market in the coming years is through the development of HPAL (high pressure acid leaching) projects in Indonesia. These projects could be central to nickel’s expansion in the next few years. However, HPAL projects historically don’t have a strong track record of success. With so many technical and production volume challenges, the HPAL revolution will likely be delayed by coronavirus shutdowns.
While, at present, nickel intermediates from Indonesia do not commonly enter the battery supply chain, Benchmark Minerals’ Nickel Forecast shows that 3,000 tonnes of nickel in MHP from new HPAL projects will come online in 2020, as several Indonesian projects are set to begin commissioning in late 2020. However, as Indonesia struggles to contain the spread of the coronavirus, these timelines may be pushed back into 2021 and the projects are likely to face capex increases.
We are also going to see the wider macro pressures slowing the capital going into new projects, and that will hinder some of the new developments in the market that are going to be needed to meet nickel sulphate demand by 2023 and 2024.
Battery raw materials – what next?
Looking broadly across battery raw materials, we’re expecting the biggest impact of the coronavirus in the short-term to be logistics of material to market. Our forecast models are showing that the medium-term outlook for demand growth from the battery sector across all of these markets will be disrupted. The positive of that is that China is still a large part of demand and we expect to see more positive signs in the second half of the year from the Chinese market. On the battery demand side, we are still projecting an upward correction in the market that is likely to bring battery demand growth back on track to where it was likely going to be by 2023.
The biggest hit regarding the supply side of battery raw materials will be in the longer-term. We expect the wider macro-economic constraints that have emerged in 2020 to lead to less funding of new projects. We are already at a more volatile time for each of these as a huge amount of investment over the next 12-18 months is needed to meet projected demand by the mid-2020s. If those growth rates stay in place then the industry has an even bigger challenge to meet growing demand.