What happened to the lithium boom?

Powering the switch to electric cars, lithium stocks were meant to fly this year, but the sharemarket reversals have been dramatic. Here’s what went wrong.

A worker walks across a bridge at the processing plant of the Pilbara Minerals Ltd. Pilgangoora lithium project at Port Hedland, Western Australia. Picture: Bloomberg

After setting records in 2022, lithium prices have dropped on weaker demand from battery makers, with the prices of lithium miners also falling sharply. The outlook remains very uncertain as lithium supply ramps up in response to rising demand, with the Australian government forecasting a significant drop in export earnings from this critical mineral.

Lithium is an important element for the creation of renewable energy, given its use in lithium-ion batteries which are used to power electric vehicles. As more countries move towards clean energy, the demand for lithium is expected to keep rising.

However, at the same time, the supply of the critical metal is rapidly increasing.

Lithium prices rose dramatically in 2022, as rapidly growing global demand outpaced growth in global supply. This year, the story is different and prices have dropped significantly, as have the prices of Australian lithium miners. Mineral Resources and Allkem have both fallen close to 20 per cent, Core Lithium over 70 per cent, while Lake Resources has fallen particularly hard, down by more than 80 per cent. In contrast, Pilbara Minerals has outperformed and maintained its price. That compares to a modest gain of around 3 per cent for the ASX 200 and a flat performance for the ASX 200 resources index.

 Volatility in lithium markets will continue in the short to midterm, which could continue to place downward pressure on Australian lithium miners. Recent lower than expected EV production figures have tempered sentiment in the space, as reflected in spot pricing and short-term supply contracts, leading to uncertainty for longer-term demand of the commodity.

Meanwhile, global supply of lithium continues to ramp up with several projects coming online despite the recent collapse in price.

This is evident in forecasts from the Australian government. In its June 2023 outlook, the Office of the Chief Economist (OCE) of the Department of Industry, Science and Resources says future export earnings from lithium are forecast to fall as lithium prices decrease as global supply catches up to demand. The OCE forecasts that the value of lithium exports will decline to $17.8bn in 2023-24, then decrease further to $14.9bn in 2024-25. The declines will be driven by falling lithium prices in both 2023-24 and 2024-25.

 Mine production in Australia is expected to keep growing significantly due to new mines and the expansion of existing facilities. Rising mine production is driven by expansion of existing mines, including Greenbushes, Wodgina, Pilgangoora, Mt Marion and Mt Cattlin. Furthermore, production has commenced at Finniss and is expected to commence at Mt Holland and Kathleen Valley. Other lithium deposits are under exploration and are assumed to not achieve production by 2025. Given this greater supply, lithium prices are forecast by the OCE to “decline significantly in 2024 and 2025, as the supply of lithium catches up to demand”. Global lithium supply is not only increasing, but also diversifying, reflecting efforts by governments globally to secure supplies of critical minerals needed for decarbonisation. Australia leads global lithium extraction (with 50 per cent of global production in 2022) and spodumene production is forecast to increase from 382,000 to 631,000 tonnes LCE in the 2022-25 period.

Argentina, Canada and Zimbabwe are expected to significantly increase lithium extrac­tion and account for a combined 19 per cent share of global extraction by 2025, up from 5.1 per cent in 2022.

Importantly, uncertainty exists in the long-term demand for lithium due to potential technological advancements in extraction, as well the underlying use in electric vehicles. The demand for lithium is very much driven by the economic viability of competing battery technologies. Lithium-ion batteries are currently considered the most viable due to their low weight and storage and discharge characteristics. However, advancement in lithium-ion alternatives, including sodium-ion and solid-state alternatives, threatens the long-term demand fundamentals for lithium.

 Separately, investors need to consider that the lithium market is relatively immature compared to other bulk base metals in the way it is traded and priced across global markets, as the size of the market has rapidly grown. Pricing mechanisms and contracts between suppliers, refineries and consumers are convoluted and at times opaque, although benchmark pricing and spot prices have recently evolved.

China remains the dominant consumer of raw concentrated minerals and wields a huge influence over the market. China’s dominance is expected to continue due to advantages in regulation, and access to capital through state-endorsed infrastructure investment. The energy intensity of lithium refining is also a major consideration and an impediment to ending the reliance on Chinese refineries.

Our preferred approach is to focus investment in sectors where strong demand is projected and supply is likely to be constrained. For example, copper’s demand is underwritten not only by adoption of EVs, but also the build-out of energy infrastructure and development of emerging economies. Despite these strong fundamentals, supply is projected to decrease as it becomes more difficult to sanction and commission large new copper mines worldwide. The copper market is deep and mature, and substitution of copper in its end uses is difficult.

Ben Salter is an investment manager focused on decarbonisation at the Victor Smorgon Group