Lithium oversupply hurts Australian miners

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The lithium industry has been riding on a rollercoaster in recent years, experiencing rapid demand growth, supply bottlenecks and oversupply of mined products. The oversupply, caused largely by the opening of lithium mineral operations in Australia, outpaced the EV boom and mineral conversion capacity in China and led to tumbling lithium prices.

Six lithium mines have opened in Australia since 2017 while sales growth has slowed down in China, the largest market, according to Bloomberg NEF. As prices for lithium almost tripled between mid-2015 and mid-2018 with the world’s EV fleet hitting the 5 million mark, the lithium-ion battery manufacturers began to fret over the supply of raw materials. In the first quarter of 2019, sales of electric vehicles in China grew by about 90% year-on-year. While that sounds impressive, it’s half the growth seen between 2017 and 2018, according to Nikolas Soulopoulos at BNEF in London.

The present lithium oversupply is a side effect of miners attempting to position output to meet an expected rapid rise in future demand, which has been exacerbated by a slowdown in the ability to convert mined ore into lithium materials. As a result, monthly average lithium carbonate spot prices fell from a peak of US$ 22.89/kg in February 2018 to US$11.28/kg by October that year, a fall of 51% largely because of supply side pressures, finds London-based consultant Roskill. Prices have continued to fall into 2019, reaching US$ 9.56/kg in June.

According to Morgan Stanley, lithium prices will stay on the downward trajectory in the years ahead. The investment bank said it expects lithium prices to experience a 30% fall over the next six years, as new technologies lower the cost of production and keep the market oversupplied.

Australian miners suffer a blow

This has come as somewhat of a surprise for bullish lithium miners and producers. According to an index compiled by Benchmark Mineral Intelligence, lithium prices have fallen by 9% this year, hitting share prices of the largest producers. Shares in U.S. producer Albemarle are down by 10% this year, while those of Chile’s SQM have fallen by 23%.

Australian exporters are also struggling with the new market reality. ASX-listed mining company Galaxy Resources confirmed that its export volumes for the six months to June 30 would be just half that shipped in the respective period of last year. According to the company, extremely weak exports in the first three months of 2019 were on its customers having high inventory levels.

Lithium exporter Pilbara Minerals said it was reducing production from its Pilgangoora mine in response to reduced demand from Asian customers. The company explained the Chinese utilities that convert Australia’s lithium-rich spodumene concentrate into battery-grade lithium had been slow to construct and commission new conversion capacity, and therefore were not ready to take the volumes they had ordered.

On Monday Mineral Resources said in an ASX statement it would drop the price of its 6% spodumene concentrate for this quarter by 11% – almost US$80 a tonne. The concentrate, from the company’s Mt Marion mine in WA’s Goldfields region, will be sold for US$608.95 per dry metric tonne compared to US$682.38 for the previous quarter.

For miners and producers in Australia and elsewhere, the situation is expected to remain unchanged until the EV uptake kicks into gear. BloombergNEF forecasts the supply of lithium-ion batteries will need to increase by more than 10-fold by 2030, with electric vehicles accounting for more than 70% of that demand.

In the meantime, spodumene ore — the precursor material for lithium hydroxide — is expected to face a longer period of oversupply, with prices remaining soft.  According to the Australian federal government’s most recent Resources and Energy Quarterly, lithium hydroxide prices are projected to fall by around 15% in 2019, as oversupply persists and inventories grow. The supply surplus is projected to gradually close, with the price expected to start turning around after 2020.

“The fact that supply is being triangulated against future demand makes it somewhat unlikely that oversupply will correct in the very near future. However, demand growth is likely to outstrip supply by around 2023,” the report states.