Lithium bulls need to chill out

Battery metal bulls suddenly have more to cheer about. This week saw the flashy launch of VW’s ID. 3, a mass-market hatchback that symbolises the potential market for the lithium that powers its battery. Last week, China’s Contemporary Amperex Technology (CATL) bought an 8.5 per cent stake in Australian lithium miner Pilbara Minerals.

The investment by China’s biggest battery producer — and supplier to carmakers including VW, Toyota and Volvo — was seen as a vote of confidence for the sector, which supporters say will be a big beneficiary from decarbonisation and the mass adoption of electric vehicles.

“While there has been commentary talking down the current state of lithium markets, it has belied the significant interest we have continued to see from the strategic players,” said Ken Brinsden, managing director of Pilbara. It is developing Pilgangoora, one of the world’s biggest new lithium projects, located in Western Australia’s Pilbara region.

So does CATL’s investment in Pilbara — part of a $60m wider fundraising — signal the end of what one analyst has described as the “big lithium short”?

The deal follows a brutal year for the lithium industry. Lithium carbonate for delivery into Asia has fallen from more than $18,000 a tonne in May 2018 to around $10,000 a tonne today, according to S&P Global Platts. Share prices have followed. Pilbara Minerals, for example, has dropped more than 70 per cent from last year’s high as fears of a supply glut have taken hold.

Bernstein Research estimates there are 750,000 tonnes of fresh supply that can be brought on line over the next three years. By comparison, global lithium production was less 300,000 tonnes last year.

“Of course not all of these projects will be approved,” says Paul Gait, analyst at Bernstein Research. “But is striking how quickly the supply can essentially triple.”

Viewed through that lens, CATL’s investment in Pilbara is bad news for the industry because it means another 90,000 tonnes of capacity has heavyweight financial backing.

That is one reason why Mr Gait and others do not see lithium prices rebounding. They think things will get worse before they get better. “Huge capacity in the pipeline and oversupply will keep prices punishing producer margins until sufficient cuts are made,” says Citi analyst Oliver Nugent.

While low prices have triggered some production cuts and project delays, lithium producers have not materially changed their long-term supply plans. That is perhaps unsurprising. EV-related demand is not going away given that battery-powered vehicles will have a big part to play in lowering global emissions.

But it is only when those attitudes start to shift and projects are scrapped that investors can be sure lithium prices have really bottomed. Until then, the spectre of quick to develop supply will continue to hang over the sector.

“Lithium may not be recognised as a typical commodity but it cannot be wholly expected to break away from the economics of supply and demand,” says Mr Nugent.