The first quarter of the calendar year is historically the slowest period of the year for lithium consumption due to adjustments to Electric Vehicle ("EV") subsidy policy, seasonal destocking, scheduled maintenance outages and the Lunar New Year break in the world's largest market, China. During the quarter, demand continued to grow steadily in volume, albeit at a lower rate than expected and slower than what many had become accustomed to over the last few quarters.

In China, some EV OEMs sought to gain market share through engaging in price discounting, which led consumers to delay purchases in the hope of further price reductions. The wait-and-see customer behaviour continued as Internal Combustion Engine ("ICE") vehicle OEMs pursued aggressive price reductions, in order to destock inventory that would be in breach of emissions targets being introduced in July 2023. This slower than expected EV growth impacted the battery material supply chain, which had procured feedstock and built capacity in anticipation for a higher growth rate. As a result, inventory levels reached what has been perceived as high level but, in reality, is a more normalised situation. This is in contrast to the extremely low stocks held in 2022, especially considering the complex, geographically diverse and geopolitically risky lithium supply chain characteristics.

Despite recent volatility, the fundamentals underpinning lithium demand remain very strong: EV sales continued to grow during the March quarter, with notably Chinese EV sales increasing by 25% YoY and sales in the US and EU also posting strong growth and higher-than-expected penetration against ICE vehicles. Despite a slower start to the calendar year, global EV sales forecasts remain at ~14 million units, implying a steady acceleration during the remainder of 2023. EV demand is strongly supported by government targets and policies, including the EU's parliamentary agreement that all new vehicles registered in Europe must be zero emission by 2035; and the more recently announced US Environmental Protection Agency rule that will require up to 60% of new car sales to be EVs by 2030, and 67% by 2032.

Delays to additional supply materialising on time and on budget continued throughout the quarter. This reflects the complexity involved in expansion projects, irrespective of the supply being brownfield or greenfield, in hard-rock or brines, upstream or midstream. Furthermore, consensus views on forecast supply appear optimistic in relation to qualification periods required for new production to be considered battery grade material. Whilst additional lithium supply is expected to be brought online in the near to medium term, the quantum of the increase is likely to continue to lag relative to consensus views on timing. Recent news about the shutdown of independent Chinese lepidolite production due to costs being higher than the local spot price are a reminder of how exposed the supply chain can be when relying on high cost and technically challenging swing capacity.

Estimated lithium chemical production in China fell 4% quarter on quarter, attributable to seasonal factors that have impacted demand. Spodumene concentrate volumes shipped to China from Australia for December to February 2023 were 20% higher compared to the PCP due to new supply from brownfield expansions and restarted idle capacity. However, spodumene supply remains tight despite production increases, with the majority of the product already locked under existing offtake arrangements or allocated for internal consumption by integrated producers.