ANZ expects a strong supply response to collapse in lithium prices to rebalance market

Amid rising China trade tensions, the return of Donald Trump to the White House could reignite lithium prices amid a strong supply response to the battery metal’s recent collapse.

After soaring from a pandemic-era low of about $US8000 a tonne in 2020 to a record high of $US85,000 in late 2022, lithium carbonate crashed 85 per cent to below $US12,000.

Amid rising trade tensions with China, a Trump presidency might just be a godsend for lithium prices.

ANZ commodity strategists Soni Kumari and Daniel Hynes said a strong supply response to the recent collapse in the price of lithium is setting the stage for a market rebalancing, and Trump’s promise to impose a 60 per cent tariff on all imports from China would likely worsen the US trade relationship with the biggest lithium refiner and manufacturer of lithium ion batteries.

China makes about 20 per cent of the world’s refined battery-grade lithium, has nearly 70 per cent of the world’s lithium refining capacity, and manufactures over 80 per cent of lithium-ion batteries.

Disruptions in China’s supply of lithium’s chemicals would mean lithium or lithium-ion batteries will need to be sourced from elsewhere, which would take time and add costs.

“China’s production of refined lithium sits in the lower quartile of the cost curve,” ANZ said.

“To stimulate an increase in production outside China, prices would need to be high.”

After soaring from a pandemic-era low of about $US8000 a tonne in 2020 to a record high of $US85,000 in late 2022, lithium carbonate crashed 85 per cent to below $US12,000 as producers nearly doubled their capex in 2022, boosting supply from countries including Australia.

It came as China increased its lithium refining capacity to 1.4 million tonnes and doubled its refined lithium output to 600,000 tonnes in 2023. Global refined supply topped 1m tonnes in 2023.

“At the same time, global EV sales growth fell to 30-35 per cent from a staggering 70–75 per cent in 2021–22. A strong build-up in battery-making capacity in China elevated inventories of batteries globally. Strong supply on weak demand led to a sharp fall in lithium prices,” ANZ said.

But demand for lithium to support the electrification of the transport sector remains strong.

ANZ sees demand for lithium and lithium-ion batteries growing 17–18 per cent annually through 2030. The supply overhang is “not that large and the fall in prices looks overdone”.

With lithium prices now trading “deep into its cost curve”, the bank said supply reductions are likely.

“Producer profit margins have narrowed, with miners and processors reducing planned capital expenditure over the coming years,” the ANZ commodity strategists said.

“There have been curbs in non-essential capital expenditure with increased focus on cost optimisation. This is likely to happen along the lithium production chain.”

The bank points to numerous company announcements indicating that miners and processors are having difficulty securing finances for their projects in the current price environment.

As a result, green and brownfield project investments will be deferred by many companies.

While most of the supply rationalisation news has come from Australian producers, the response of Chinese miners and processors is critical. China processes most of the world’s lithium, and costs for processors who don’t directly mine the metal will be higher, according to Wood Mackenzie.

Expansion outside China might slow due to unfavourable price levels, depletion of high-grade resources, processing and labour costs, environmental scrutiny squeezing profit margins and output.

ANZ expects prices to stabilise in the near term and lift to US$16,000–$US18,000 by 2025.

But other factors apart from market rebalancing suggest lithium deserves a higher price.

For one thing, China’s dominance of downstream lithium processing “complicates” the market.

With the energy transition accelerating, competition for supplies of critical minerals like lithium has intensified at the same time that trade relations with China have deteriorated in recent years.

With the US and Europe recently announcing tariffs on imports of Chinese electric vehicles and other products, trade tension with major markets like Europe and the US raises sourcing risks around essential components for EVs, according to ANZ.

The American Clean Power Association has approved a decision by the Biden administration to impose Section 301 tariffs on lithium-ion batteries imported from China to the US.

Tax rates increased to 100 per cent on imported EVs, 25 per cent for lithium-ion batteries for EVs and battery parts, and 25 per cent on natural graphite and permanent magnets, effective over 2024–26.

“Further, a Trump presidency could bring other challenges,” the ANZ strategists said.

Resource nationalism is another challenge for the lithium market.

Chile, the second largest lithium producer and holder of the largest lithium reserves, now requires that state-owned companies must have a controlling stake in all of its lithium resources and projects.

BYD electric cars waiting to be loaded onto a ship at the international container terminal of Taicang Port in Suzhou, in China. A sharp fall in lithium prices has reduced the cost of lithium-ion batteries, potentially increasing the adoption of EVs. Picture: AFP

The policy also calls for all new mines to use a new processing technique, called direct lithium extraction, which uses less water. Most of Chile’s lithium is in deposits of saline groundwater that is rich in dissolved lithium. Extracting the metal uses two million litres of water per tonne of metal. The deposits are in the Atacama Desert, which receives less than a millimetre of rain each year.

“DLE extracts lithium from brine or other sources and uses significantly less water, but it is in the early stages of development and is not yet widely used in commercial production,” ANZ said.

Chilean output is currently restricted to SQM and Albemarle Corp, each mining a single salt flat.

“Together, they have more than 100,000 tonnes of new capacity planned over the next decade, and it is unclear whether these projects will be required to use DLE,” ANZ said.

“If so, we foresee a significantly slower growth profile.

“This will likely delay investments by foreign companies, impacting future supply.”

Meanwhile ANZ said the energy transition in the US, Europe, China and India will support demand.

Further, a sharp fall in lithium prices has reduced the cost of lithium-ion batteries, potentially increasing the adoption of EVs, for which the battery is often 25–30 per cent of the cost.

A lower battery cost will narrow the price difference between conventional cars and EVs and stationary battery storage could gain momentum from the recent fall in lithium and battery prices.

“We think prices are at a level that could stimulate a wave of restocking, as the energy transition continues,” ANZ said. “The energy transition is also insulating battery demand from the broader business cycle downturn, and this should help the market weather other headwinds.”

Meanwhile, Australian uranium miners soared 6-9 per cent as Kazakhstan boosted its mining tax.

Paladin jumped 6.2 per cent to $13.98, Boss Energy rose 6.2 per cent to $3.98 and Deep Yellow surged 9.2 per cent to $1.49.

Originally published as ANZ expects a strong supply response to collapse in lithium prices to rebalance market