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Tight supply forecast

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The run-up in lithium prices is a timely reminder of the need for more supply. Though more capacity is on the way, including processing capacity in China, the key will be whether there is sufficient raw material to enable processors to ramp-up output while they commission their new capacity. Indeed, there is unlikely to be enough and we see availability of raw material as the current bottleneck in the lithium supply chain. Overall, our forecasts for supply suggest the market will remain in a supply surplus this year, at least in theory, but in reality that surplus is likely to be more than absorbed while the supply chain restocks and builds up working inventory.
The supply situation is complicated: there is existing production; there is idle capacity (some of which will be trying to restart and some of which is unlikely to be in a hurry to restart); there are capacity expansions; and there are existing stockpiles of lithium-bearing material. Combined, we expect more lithium will be produced than is consumed this year, but that does not mean the market will not suffer further bouts of tightness, which we are seeing now.
Fastmarkets estimates some 215,000 tonnes per year of extra lithium carbonate and hydroxide capacity will be commissioned in China this year. But this is capacity, not production. Production will fall well short of capacity for numerous reasons, including lack of enough feedstock, the time taken to ramp up output and the time needed to qualify the new production. In addition to some new Chinese raw material production, there will also be other supply increases from outside China (see table) and there is stockpiled material too that can be processed to boost this year’s supply.
The increase in new capacity in China will mean availability of processed material will be responsive to any increase in raw material availability, especially amongst the non-integrated chemical convertors. In addition, the higher prices this year are expected to result in the processing of the remaining direct shipping ore (DSO) that China imported in 2017 and 2018, but which then became uneconomical to process after lithium prices fell.

The Wodgina mine and Pilbara Minerals’ Pilgangora mine were the two main exporters of DSO, with Wodgina starting in 2017 and Pilbara in 2018. Pilbara exported some 350,000 tonnes of DSO, equivalent to around 4,000 tonnes of lithium carbonate equivalent (LCE), before it started to produce and export spodumene. Wodgina exported around 4.2 million tonnes of DSO in 2017-2018, before halting output after prices fell. Out of the some 4.5 million tonnes of DSO shipped, we estimate some 30% is still available, equivalent to some 15,000 tonnes LCE, but that might be a conservative estimate.
Other main changes we expect outside of China are the ramp-up towards full capacity at Pilbara and Galaxy Resources, and a return to higher output at Talison Lithium’s Greenbushes mine in Western Australia, following below-capacity production in 2020, owing to the oversupply and the low price environment. For Greenbushes, capacity has increased to 1.2 million tonnes of spodumene (150,000 tonnes LCE), from 600,000 tonnes (75,000 tonnes LCE) of battery-grade spodumene, but at what capacity utilization the mine operates remains to be seen and that is likely to be tied into when Albemarle’s Kemerton lithium hydroxide processing plant starts up. We anticipate a restart at the Altura mine in the fourth quarter, the restart of Albemarle’s North American operations, an increase in sales at Livent and slightly higher production at Orocobre.

Chile’s Sociedad Quimica y Minera (SQM) plans to increase capacity to 120,000 tpy by the end of this year and, after it produced 70,000 tonnes in 2020 and sold 64,000 tonnes last year, we expect SQM to produce 85,000 tonnes this year, with sales nearer to 90,000 tonnes. SQM’s sales could be even higher, as it managed to sell 25,800 tonnes in the fourth quarter 2020, meaning it has the logistics to do similar volumes in the quarters ahead, and it has stockpiles of lithium too.
In terms of extra tonnage this year, the big potential increases come from Greenbushes, Pilbara and SQM, plus Lanke Lithium in China, with smaller production increases at other operations. A restart at Altura could possibly be brought forward, but for now we are expecting a restart in the fourth quarter. Most commentators expect lithium demand to increase by around 90,000 tonnes LCE this year, and given that will mean an increase in downstream manufacturing capacity, the increase in consumption will mean there is a need for the whole supply chain to run with more working stock, so apparent demand will rise by more than actual demand. Hence even though we think supply will outstrip consumption, we think the surplus will be absorbed by the supply chain requiring more stock.

Our forecast is for supply, including new production, processing of stockpiled material and destocking, to increase by around 122,000 tonnes this year – this should mean there is no shortage but, allowing for more restocking and more working stock, the market is likely to remain tight, especially for those who have not secured supply and who rely on the spot market.
The production cutbacks in recent years, combined with the faster uptake of electric vehicles and energy storage systems, have meant the lithium market has tightened sooner than most thought it would. There is new capacity and idle capacity and some companies could expand production at a fairly fast pace should they want, so we have now entered a period where producers are going to have to be very focused to ensure they have enough capacity available in a timely manner. It will likely be a precarious balance for a good few years now, and even more so further ahead because unless final investment decisions are made soon on the next generation of projects, shortages and supply tightness are likely to prevail.

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