Lithium poised for the next upward trend
In 1817, Swedish chemist Johan August Arfwedson made a groundbreaking discovery when he identified lithium while analyzing petalite, a mineral found in the Utö Mine located on Utö Island in the Stockholm Archipelago, Sweden. This historic finding marked the beginning of our understanding of lithium's unique properties. Fast forward 200 years, and lithium finds itself at the center of one of the most transformative shifts in recent history. Today, lithium plays a pivotal role in driving the energy transition and is instrumental in achieving decarbonization goals worldwide. Its significance lies in its ability to facilitate the widespread adoption of electric vehicles and energy storage systems.
According to data from Benchmark Mineral Intelligence, it is projected that more than 85% of the global lithium supply in 2023 will be used in lithium-ion batteries. These batteries, in turn, will primarily power electric vehicles and energy storage systems. As the energy transition gains momentum, the demand for lithium continues to soar, making it a crucial indicator of the growing appetite for electric vehicles. Lithium's prominent role in these emerging sectors positions it as an excellent proxy for gauging electric vehicle penetration. The remarkable rise in demand for lithium reflects the increasing recognition of its importance in the clean energy revolution. As governments, industries, and individuals strive to reduce carbon emissions and transition to sustainable transportation, lithium emerges as a key component driving this transformation. Its unique properties and versatile applications make it a vital resource for achieving a greener and more sustainable future.
Lithium in long-term supply deficit
Lithium continues to face a long-term supply deficit, but recently we have witnessed a short-term supply glut caused by inventory drawdowns, coinciding with a seasonal lull in electric vehicle sales in China. Additionally, new lithium projects originally planned for 2022 have come online and are now contributing to the overall supply in 2023. Furthermore, swing producers of higher-cost sources, such as lepidolite from China, has had an impact on the short-term supply dynamics. However, it is worth noting that many of these swing producers have now ceased their operations due to low prices in the market.
The nature of new lithium supply can be better understood as a staircase rather than a linear progression, marked by intermittent steps of growth. In contrast, demand for lithium tends to exhibit a more consistent linear growth pattern. Consequently, the lithium market can experience short-term periods of supply gluts when new projects enter production, as the supply increment may temporarily outpace demand. However, it's important to note that this temporary supply glut is just that - temporary. The long-term supply deficit remains intact. Persistent delays continue to hamper the timely production of new lithium projects, resulting in an average project delay of approximately 3 years (excluding production ramp-ups to nameplate capacity), according to research conducted by Canaccord Genuity. On the other hand, demand consistently exceeds expectations, repeatedly surprising on the upside. These dynamics reinforce the underlying strength of the lithium market and support the notion of a sustained supply-demand imbalance. The lithium supply deficit is expected to widen throughout the decade and the imbalance reinforces the need for higher lithium prices, as they serve as the primary incentive for the development and construction of new projects in the sector.
Zooming in on electric vehicle demand
"Looking at the broader picture, the projected electric vehicle sales for this year are extraordinary, with an estimated 14.7 million units expected to be sold."
First and foremost, we like to point out that we strongly reject the notion of fading electric vehicle sales, as it fails to capture the complete picture. It is important to emphasize that what may appear as fading demand is actually a well-established seasonal pattern, observed year after year. Historically, electric vehicle sales have demonstrated a slow start at the beginning of each year, followed by a gradual and consistent increase throughout the remainder of the year. Therefore, rather than subscribing to the fading sales narrative, we recognize this as a predictable seasonal trend in the industry.
Rather than focusing on fading demand narratives, it is more meaningful to assess electric vehicle sales by comparing them to the corresponding period in the previous year. Taking a closer look at a prominent electric vehicle manufacturer like BYD, we can observe their exceptional performance. From January through April, BYD recorded sales of 776,631 electric vehicles, indicating an impressive year-on-year growth rate of 94.30%. These figures strongly indicate that the demand for electric vehicles is far from fading.
Looking at the broader picture, the projected electric vehicle sales for this year are extraordinary, with an estimated 14.7 million units expected to be sold. This represents a significant year-over-year growth of 36% compared to the 10.8 million units sold in 2022. In terms of relative strength, the United States is projected to be a robust demand driver, with an impressive year-on-year growth rate of around 45%. However, it is China that truly stands out, outpacing the rest of the world and accounting for approximately 65% of the expected electric vehicle sales for 2023. These figures demonstrate the escalating adoption of electric vehicles globally.
Beyond examining electric vehicle sales alone, it is essential to take into account the total lithium-ion battery demand from these vehicles in terms of kilowatt-hours (kWh). As there is a growing emphasis on achieving greater range and consumer preferences towards larger vehicles, it is anticipated that the average battery size will increase, leading to a higher lithium requirement per vehicle sold.
Energy storage adoption is accelerating
"According to projections, the demand for ESS is expected to experience a remarkable surge, with a compound annual growth rate (CAGR) of approximately 80% between 2022 and 2025E."
Demand for lithium is no longer solely driven by electric vehicles. The rapid expansion of renewable energy sources has led to a burgeoning demand for energy storage applications, which now serves as the next major catalyst for lithium. As renewable energy continues to grow, the need for efficient energy storage solutions becomes increasingly crucial, further propelling the demand for lithium. In this domain, CATL emerges as the undisputed leader, commanding a market share of approximately 43%, followed by BYD with a 12% global market share. Energy storage systems (ESS) have become the fastest-growing driver of lithium demand. According to projections, the demand for ESS is expected to experience a remarkable surge, with a compound annual growth rate (CAGR) of approximately 80% between 2022 and 2025E. Additionally, ESS installations are anticipated to grow by over 100% compared to the previous year and it is especially utility-scale ESS that is the main growth driver. In the U.S. utility-scale ESS accounted for over 80% of ESS installations in 2022, a trend that is likely to continue. As the energy storage sector continues to thrive, the significance of lithium in meeting these growing demands becomes increasingly apparent.
Factors explaining the falling lithium prices in China
Despite strong fundamentals supporting the lithium market, there has been a notable decline in lithium spot prices in China year to date, raising questions about the reasons behind this downward trend. According to Albemarle's CEO Kent Masters, the spot prices for lithium, particularly carbonate, have decreased in China due to destocking in the battery supply chain. The recent inventory drawdowns were motivated by high prices and inventory levels in the battery value chain, and the battery supply chain opted to reduce inventory rather than pay inflated costs. The destocking activity exerted downward pressure on prices, and lower spot prices were further compounded by the introduction of a new lithium pricing structure by CATL, which subsequently created confusion in the market. This effect was further amplified during a period characterized by seasonally weaker electric vehicle sales. We believe that the decrease in spot prices does not necessarily reflect the overall state of the market beyond China and we have seen divergence in prices in other geographies. However, it is evident that Chinese prices have had a significant impact on market sentiment, particularly in the stock market, making it crucial for us to closely monitor and take them into consideration.
Our analysis indicates that Chinese spot prices for lithium have likely bottomed out in April and are now moving higher again. We have already seen signs of a V-shaped recovery in spot prices in just the last month with spot prices bouncing back from unsustainable lows. With battery restocking in China expected in 2H23 and electric vehicle sales entering a seasonal strong period, we believe there is significant potential for the sector's upward movement. As a result, lithium stocks are poised for a re-rate, presenting an opportune time for investors to get involved again.
Further M&A activity on the horizon and a more bullish tone from institutions
The lithium industry is expected to witness further consolidation through increased M&A activity. Notable developments in this sector include Albemarle's recent takeover offer for Liontown, which is a significant development for the lithium sector. This move is a clear indication that the long-term supply deficit for this critical mineral is still a major concern for the industry. Furthermore, the merger between Allkem and Livent, announced in early May, has provided another positive indicator, with both stocks experiencing a surge upon the announcement. As the industry strives to secure lithium supply, we anticipate that M&A activity will intensify in the coming months.
Several investment banks have recently turned bullish on the lithium sector, with updated price forecasts, resulting in increased target prices across the entire lithium industry. Canaccord Genuity, a renowned leader in the lithium space, has recently raised target prices for more than 20 lithium companies within their coverage. Interestingly, while many retail investors may have lost patience during the recent weakness, institutions have been seizing the opportunity, recognizing the short-term nature of the downturn.
How to get positioned
The prospects for lithium remain highly promising, and the current moment presents a favorable opportunity to get involved, just as Thematica has done through our Thematica – Future Mobility fund. Thematica is currently focusing on lithium companies with projects in jurisdictions like Australia, Argentina, and Brazil and invests in companies like Lithium Americas, Allkem, Sigma Lithium, and Galan Lithium among others. While there are certainly individual projects in the U.S. and Canada of interest, it's crucial to recognize that these markets come with their own set of challenges. Permitting issues and delays, in particular, are potential red flags and fatal flaws that often make us exercise greater caution when it comes to these markets.
The confluence of battery restocking, the rapid growth of energy storage systems and electric vehicle sales, alongside increased M&A activity, serves as the key catalysts that will propel lithium prices and drive the overall market to unprecedented levels. These powerful forces are set to shape the future of the lithium industry, creating a compelling landscape for investors and stakeholders alike. The recent pullback in lithium prices represents an excellent chance to re-engage in the lithium sector and capitalize on its potential once again. It seems that lithium prices in China have reached their bottom and are now poised for an upward trend, indicating the potential for the next significant market upswing. If you haven't been paying attention to the lithium market, consider this a clear indication to start taking notice and delve into its potential.