The next steps for lithium

Summary: Lithium prices have fallen markedly this year, which presents the industry with a chance to develop.

Key take-out: The Australian lithium industry is evolving as prices cool off.

Australia’s lithium boom is over. This is not necessarily a bad thing because now the real business of developing a sustainable industry based on low-cost, high-grade production of the key energy metal can begin.

A 50 per cent collapse in the price of lithium over the past 10 months is one measure of the change. Another is the fact that some producers have switched from shipping low-grade, unprocessed ore to higher-grade raw material, and in some cases, a fully-processed product to meet battery-maker specifications.

On the way to maturity, there will be winners and losers among the many small mining companies which made – or tried to make – the shift from conventional metals such as gold and copper to a place in the new energy business being driven largely by the expansion of electric car manufacturing.

Other metals used in the production of batteries for cars and a wide range of other technologies – such as graphite and cobalt – have also seen steep price falls as supply has overpowered slower than forecast demand growth, as was last explored here two months ago.  

What’s happening in lithium is a mirror image of the way in which earlier mining booms have unfolded. The process typically starts with a stampede across the outback, followed by a sifting process based on simple tests which start with an assessment of ore grade, and move up to profitability.

The lithium shake-out began earlier this year, when it became clear that the electric car revolution was not going to happen as quickly as some promoters had promised. This is because much of the early demand was dependent on government subsidies, which are slowly being withdrawn. On the other side, potential car buyers have balked at the short range of early electric vehicle models and the shortage of charging stations.

Sluggish electric car sales in key markets such as China and some European countries created a build-up of lithium in the battery-making sector. They also led to a spectacular fall in lithium prices, which are down 33 per cent since the middle of the year, taking the fall since January to 55 per cent.

The problem for investors with an interest in the lithium sector is that it is not just a case of trying to identify winners and losers. There is also the challenge of understanding the business – starting with the different ways it is ‘mined’, and the different types of lithium.

The evolution of the industry

Until a few years ago, lithium was an exotic material controlled by a handful of companies with roots in the speciality chemical business. These were led by SQM in Chile, which also produces fertiliser and iodine from brine (salt) lakes in the Andes Mountains, and Albemarle of the US, which operates in Chile and at the Greenbushes mine in Western Australia, which is co-owned with China’s Tianqi Lithium.

The trigger for a surge in the Australian lithium industry three years ago was a combination of demand from battery-makers as mass-produced electric cars started to reach consumers, and the slow build-up of new brine capacity in South America – a process requiring months of uninterrupted sunlight to dry the brine, leaving lithium and other salts for harvesting.

A shortfall of supply in 2015 – as battery-makers geared up to supply electric car companies – saw the price of lithium rocket from close to $US5,000 a tonne to almost $25,000/t by early 2016. This created perfect conditions for Australia’s easy to mine lithium which comes from conventional open-pit mines.

Rushing to meet battery-maker demand and the lure of sky-high prices saw early movers in Australian lithium create an entirely new business – the shipment of unprocessed raw material (direct shipping ore – DSO) grading 2 per cent lithium and less.

Given the multiple stages of handling from mines to end customers, the DSO phase of lithium mining could never survive – particularly when the price started to fall sharply, as it did earlier this year.

Surviving the price collapse meant that DSO had to be upgraded to a concentrate which – in most cases – contains 6 per cent lithium. However, even this phase of the business will be superseded by more complex processing, which means mining companies must either become specialty chemical companies like SQM and Albemarle, or quit.

The immediate target of most miners today is to achieve production of lithium carbonate – a material grading at least 99 per cent lithium (and up to 99.5 per cent) – or lithium hydroxide, which is 96 per cent lithium, and a preferred material of the battery-makers.

Moving further up the value-added chain means that a second phase of Australia’s lithium industry is developing a more capital-intensive process of building processing plants.

Who will lead the way?

The switch from shipping unprocessed ore to value-added processing is a key step in the maturity of the Australian lithium business. However, it also means a big change in the industry, which will have fewer participants than in the boom.

The big producers with a deep understanding of the process of converting lithium ore to carbonate or hydroxide are certain to remain major players in Australian lithium. These companies are the global leaders such as Albemarle, Tianqi and SQM – which is adding an Australian operation to compliment its base in Chile.

Other companies likely to succeed in the upgrading process include early movers such as Mineral Resources, Galaxy Resources, Pilbara Minerals, Altura Mining, Tawana Resources and Orocobre – which has a brine operation in South America.

Lurking in the background, but not yet a player in the lithium game, are the major miners such as Rio Tinto – which has made a significant discovery called Jadar in Serbia. However, there is uncertainty as to how or when to develop the project because with Jadar’s lithium will come a by-product called boron, and too much boron could damage an existing Rio Tinto boron mine in California.

Like all industries born in a boom, the process of contracting after a price fall means a consolidation phase is not far away. Companies unable to find the capital to become carbonate or hydroxide producers will likely become takeover targets for their orebodies.

Next steps for the lithium price

A modest rebound in the lithium price over the next few months has recently been tipped by analysts at investment bank Citi. This would be a spark for the consolidation phase, which could cause a number of small Australian miners operating in close proximity to merge their operations.

“Demand weakness and supply strength has combined to crush lithium prices,” Citi said.

“After the rout has stabilised (as it has) in recent weeks we see the potential for lithium prices to recover somewhat in the December quarter to around $US10,000/t, compared with the current price of $9000/t, driven by high seasonal demand and winter effected Chinese brine supply (not enough sunlight hours).

“Producers such as Albemarle, SQM (and another producer called FMC) which have contracted prices and volumes for three-to-five years will be somewhat insulated from the (recent) price correction and continue to deliver volume growth.”

However, Citi sees marginal projects and those not yet funded being squeezed, as the high volumes push the long-term price down to $US7,500/t for industrial grade lithium carbonate, $US9,000/t for battery-grade and $US9,500/t for lithium hydroxide.

Without a shake-out of the pipeline of proposed projects, the lithium sector could face a massive surplus of supply by the year 2022. Output could possibly reach 719,000t of lithium carbonate according to Citi, which would overpower the estimated demand figure of 482,000t.

In effect, if Citi’s projections are correct, there could be a 33 per cent surplus of lithium available. However, what tends to happen in these situations is that unfunded projects do not get developed, high-cost projects get squeezed out, and survivors merge to cut costs.

By any measure, the first phase of the lithium boom has ended.

The key to a repeat performance of the boom is a dramatic increase in demand for electric cars – which is likely, but exactly when that will occur is the big unknown.