The following content is excerpted from the Quarterly Report - Period ending June 2019 of Orocobre Ltd. dated July 23, 2019.
Lithium Market Overview (Q2 2019)
Orocobre maintains the view that recent softness in the lithium market is the result of industry and macro dynamics which are taking longer than anticipated to correct. The Company remains focused on strong long-term demand fundamentals driven by continued growth in the electric vehicle (EV) segment and a recovery in the energy storage system segment. As a result, Orocobre maintains long-term demand forecasts in line with the consensus of other major lithium producers, in the range of 17% to 20% CAGR between 2018 and 2025.
During Q4 FY19:
- Lithium chemical prices in the seaborne market fell incrementally as producers with undelivered CY18 contracted volume largely fulfilled these obligations during Q3 FY19
- As a result, volumes delivered during Q4 FY19 carried pricing that reflected current market conditions
- A number of customers reported high inventory levels
- The high inventory scenario is particularly prevalent in the ex-China battery supply chain however the industrial and technical market supply chains are also well served with inventory
- A cautious approach to holding inventory was most pronounced amongst customers with exposure to the Chinese market including cathode/anode manufacturers supplying China's downstream EV market. These suppliers became even more cautious as the Chinese Electric Vehicle Subsidy 'transition period' concluded on June 26
- Furthermore, a series of battery fires in Chinese EVs directly impacted production levels resulting in a preference for more stable LFP battery formats that utilise lithium carbonate.
Chinese conversion plants were not immune from the impact of domestic EV market conditions, continued economic softness and US trade-war challenges.
- Several converters reported delays to expansions due to overly aggressive project timelines, extended periods of commissioning/product qualification, tightened credit and/or limited ability to service debt
- There were also reports of interrupted production from conversion plants on account of environmental inspections and unplanned maintenance
- As a result, several independent spodumene producers were asked by customers to delay shipments, find alternative customers and/or to renegotiate offtake agreements. While initially resisting price reductions at the start of the quarter, conversion plants with high inventory began to lower prices of lithium chemicals to marginal levels.
Late in the quarter, pricing being offered by both Chinese domestic producers and seaborne suppliers reached a level that is in line with the estimated cost of production for marginal producers.
As mentioned, the Chinese EV subsidy was reduced at the end of June 2019 concluding a 3-month transition period. This coincided with the Chinese Government introducing alternative measures to indirectly support the Chinese EV market including:
- Removal of the list of approved EV suppliers which potentially now opens up the Chinese market to international companies;
- Extension of the vehicle sales tax exemption for NEVs until the end of 2020; and
- Implementation of new vehicle emissions standards in provincial regions with a sizeable vehicle population including Shanghai, Beijing, Tianjin, Guangdong and Hebei requiring vehicles sold and registered to meet benchmark world standards.
The shift in China's emissions standards from level 5 to 6 is reported to have resulted in aggressive pricing from suppliers of internal combustion engine (ICE) vehicles. However, as the process of destocking continues it's anticipated that ICE production will slow due to an inability to meet emission standards.
The European Union also announced additional CO2 emissions penalties to be introduced in 2021. Vehicle manufacturers are expected to accelerate investment in EV manufacturing facilities later this year while stepping-up efforts to form upstream alliances with battery and cathode manufacturers. Based on 2018 CO2 emissions data, Macquarie Bank estimates that it will be ~70% more expensive to maintain 2018 ICE volumes and sales rather than invest in the necessary capacity and technology for EV production (source: Macquarie Bank, 'Korea EV batteries', July 2019).
Outside of Europe and China, India's government has introduced a series of initiatives leveraging a significant budget of US$1.5 billion over three years to develop a battery supply chain. Meanwhile the US and Australian governments remain highly engaged in discussions to develop domestic battery supply chains.
