The existing challenges in the lithium market were compounded by the spread of COVID-19 during the March quarter impacting operations and logistics throughout the supply chain. As the quarter progressed it became increasingly apparent that customers downstream, particularly those in Europe and the United States (US), were impacted to a greater degree than raw materials and refining operations concentrated in Australia, China and South America. As a result, the supply/demand imbalance grew during the quarter resulting in greater pricing pressure for lithium chemicals.

During the early stages of COVID-19 the pandemic largely appeared contained to China. Shipments to Ex-China customers continued at this time although uncontracted volumes were often sold at lower prices reflecting Chinese customers absence and a need for suppliers to manage building inventory. As the pandemic breached the borders of China, the supply chain ground to a standstill. Car manufacturers in Europe and the US were the first to shut down operations or switch to producing necessary medical devices, resulting in a wave of closures or reduced operating rates upstream at battery and cathode manufacturers elsewhere. Non-battery customers including glass and ceramic producers were also forced to close manufacturing facilities as a Government directive and/or due to cancelled or indefinite delays to their customer orders.

At the conclusion of the quarter, European and US car plants were expected to be closed for approximately two to three months with an additional one to three months required to ramp operations back to previous levels. Battery and cathode suppliers are expected to adjust operations accordingly. In addition, these markets (Europe and the US) are vulnerable to an economic downturn which is expected to have an impact on lithium demand to early or mid-2021. Furthermore, the impact on electric vehicle (EV) demand of current low oil prices remains uncertain.

Meanwhile the Chinese market has progressively restarted operations. The Government has committed to extending the EV subsidy and 10% sales incentive to 2022. However, Chinese customers have been slow to return to car dealerships and as a result, lithium chemical customers have taken a 'wait-and-see' approach. Given China's economic troubles and low consumer appetite for domestic EV models hopes for the Chinese market rest heavily on further Government stimulus and continued strong sales performance from Tesla, particularly with the release of its highly anticipated Chinese-centric EV model later this year.

Orocobre shares the view that the Ex-China battery supply chain will be impacted by up to six months and economic factors are expected to delay the recovery of battery and non-battery demand to 2021. Non-battery sectors are viewed as being more vulnerable to continued sluggishness as they are highly correlated with GDP. The Chinese market is also expected to experience weak demand with EV customers purchasing opportunistically. Manufacturers are expected to keep inventories low until more definitive signs of improved and sustained demand emerge. Putting these challenges aside, Orocobre remains confident in longterm fundamentals underpinned by unwavering European carbon emissions penalties, global government EV targets and downstream expansion plans that may have been delayed, but not reduced.