Where are the Lithium prices tracking to?

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Australian Economy, Macro Economics

With the electric vehicles market zooming high, the demand in lithium sector trended up at a soaring level in the last two years but soon the headwinds on supply outweighing the demand scenario capped this advancement, as seen since the beginning of year 2018. While the ups and downs in the lithium sector are not done with yet, let us grab a look at how the sector dynamics appear at the moment given the widening of gap between bulls and bears.

  • Mining sector has seen a growth spurt in the recent years and lithium was one good play
  • Lithium share prices that advanced last year have stalled now and retreating
  • Heavy sell-off and supply overweighing demand has ruined the rally

The fluctuating lithium prices: Lithium Prices were seen to be falling to 131.24 points as at May 23, 2018 from 131.76 points at the previous trading day. The prices that were at an all-time high of 156.80 in January of 2018 had zoomed up from a record low of 62.79 in February of 2016, and are below the high levels now. However, Lithium prices have remained decent on a year-on-year basis as the demand was greater than supply. Now what is seen that there was a small fall of 12% in lithium carbonate prices in China in the first four months of 2018, but the lithium hydroxide prices have risen slightly by 1%. Overall, the lithium hydroxide and lithium carbonate prices still managed to rise on a year on year basis.

Demand Drivers: The key market drivers for lithium are electric vehicles and energy storage. The demand arose due to the emergence of electrification in the generation, storage and usage of energy. There has been a significant growth in global Electric Vehicles (EV) volumes, particularly in China, which is the most significant market driver for lithium-ion batteries. The Global EV penetration is projected to reach c.15%+ by 2025, due to the consumer demand and supportive policy. There is further demand upside due to the electrification of large commercial and industrial vehicles (buses, trucks, etc.). Moreover, Battery storage or Energy Storage has become a key resource in managing the grid stability and promoting deeper penetration of renewable energy. The Lithium-ion has emerged as the dominant rechargeable battery technology. Further, many experts have forecasted that the energy storage market could double 12 times by 2030, which means that there is an attractive investment play. Overall and as projected by many lithium players and market experts, Lithium demand is estimated to grow up to 5x from historical c.200kt LCE per annum to over 1,000kt LCE by 2025, primarily driven due to increased global electric vehicle penetration forecasts and an increase in global energy storage demand. Therefore, the industry might be required to bring online a potential c.800kt of incremental supply to meet the demand balance. Even the world’s number three lithium miner, SQM is enhancing the production in next three years and believes that demand growth of about 20% in 2018 and 2019 can balance the additional supply issues.

Growth in China: With China targeting for 20% New Energy Vehicles’ penetration by 2025, there is a good chance of generating additional demand by 2025.

Supportive Government Policies: Federal policy implementation is supportive of increased New Energy Vehicle penetration. The provincial and local support has begun to be implemented throughout major global regions, including initiatives from various cities to ban internal combustion engine (ICE) vehicles prior to the federally stated production phase out. As a result, greater penetration rates and technological advancement have continued to push NEV prices towards cost parity with ICE vehicles.

While there are forces to pull the lithium prices and thus the lithium stocks in either directions, we believe that the scenario is still not very discouraging. One ASX-listed lithium play that we believe has the potential to witness the downfall but gear up on fundamentals with any favorable boost coming from the macro environment is Galaxy Resources Limited (ASX: GXY), which has been down 22% this year to date. On the other hand, we do have Kidman Resources Ltd (ASX: KDR) that has been up 20.5% this year to date and lately got a boost from offtake agreement with Tesla.


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