While 2018 marked another year of healthy growth for the lithium market averaging ~20% growth year on year, concerns grew during the December quarter as to the impact of China's economic and market conditions. As the quarter progressed it became apparent that China's market softness was beginning to impact the greater lithium market, highlighted by a pronounced shift in trade flows. Steady growth in Chinese lithium product exports in the earlier months of CY18 accelerated throughout the December quarter as large Chinese converters targeted the markets of Japan and South Korea (China & Chile customs data). Japan and South Korea also experienced an increased volume of imports from Chile while the volume exported from Chile to China decreased. Increased competition in the seaborne market from well-established Chinese suppliers began to pressure carbonate prices in the December quarter. Meanwhile, China's spot carbonate prices remained subdued, finding a floor during the quarter but failing to deliver the anticipated seasonal lift (Asian Metals).

The change to China's Electric Vehicle (EV) policy early in CY18 continued to impact demand from the Chinese market as the battery chain has taken longer than expected to adjust operations and build technical capabilities required to produce cathodes and batteries that qualified for higher subsidy levels. Additionally, the lack of transparency and guidance from Chinese regulators regarding future EV policy direction has contributed to cautious buying behaviour amongst customers. Further weighing on these market-related factors are China's broader macro-economic issues having a range of direct and indirect impacts on the market, including lower car manufacturing, industrial production and limited access to debt.

Further upstream, domestic suppliers in China were not immune to the country's economic issues, as additional Chinese brine supply from the Qinghai region continued to be offered at reduced prices to stimulate subdued domestic demand and alleviate financial pressure on these producers. The Chinese Government's tighter regulation on access to debt was reported to have impacted at least one conversion plants' expansion plans and contributed to project delays amongst smaller, new conversion plants. Nevertheless, larger incumbent conversion plants have progressed expansion projects while growing output from existing operations, supported by improved volume and quality of feedstock supply from Australian hard rock.

Orocobre views current conditions as a short-term correction following three to four years of high growth that resulted in market prices reaching levels two to three times (or more) greater than the historical average. Long term fundamentals remain strong and are underpinned by battery manufacturer's plans with 68 lithium ion mega-factories currently in the pipeline delivering 1,450 GWh capacity and a potential 22 million EV's by 2028 (Benchmark Minerals). Furthermore, strong growth potential was exhibited by the energy storage sector with total global energy storage additions more than doubling during 2018 to 9 GWh and is forecast to grow ~80% in 2019 (Bloomberg New Energy Finance). Accordingly, Orocobre maintains long-term demand forecasts in line with the consensus of incumbent producers in the range of 18% to 20% CAGR between 2018 and 2025.