When China suffers a short circuit, the rest of the world gets a shock. The nation makes most of the world’s electric vehicles. It controls supply chains for batteries, even though it lacks large domestic deposits of lithium-bearing minerals.
Slowing EV sales in China have hit battery demand. Spot prices for lithium carbonate there have dropped 64 per cent this year to $27,298 per tonne.
Despite the global abundance of lithium, soaring prices previously had reflected a supply pinch for the refined product used in EV batteries. Top producer Albemarle recently anticipated a fivefold growth in demand by 2030. An integrated miner and refiner, the US-listed group has some of the lowest operating costs globally.
While higher prices do boost its earnings, Albemarle is less sensitive to spot market fluctuations. However, higher-cost producers, representing marginal lithium supplies made from the much cheaper spodumene ore, did begin to weigh on prices. Both Albemarle and rival Chile’s SQM at present trade at their cheapest forward earnings valuations for almost two decades.
The slowing pace of EV sales in China has undercut lithium’s price. For January and February, Chinese EV year-on-year sales growth has slowed dramatically compared with 2021 and 2022. Domestically made EVs favour batteries made using lithium carbonate as opposed to lithium hydroxide formulas more common in non-Chinese EVs. At about $15 per kg, the premium for lithium hydroxide is at five-year highs.
More positively, cash margins for the high-cost carbonate refiners — about a tenth of the total equivalent lithium material supply — have turned deeply negative. Key input spodumene may need to fall a further 40 per cent before break-even is reached, thinks Morgan Stanley. This should curtail further spodumene investment short term.
An economic recovery in China may improve matters in the lithium market, though the speculative frenzy has probably ended. Those confident of a recovery in lithium prices and the long-term potential for electrification of transport should consider the shares of Albemarle and SQM.