Early signs of improved market conditions emerged late in the quarter as several supportive demand catalysts began to build. Europe recorded year-on-year EV sales growth of approximately 170% during the September quarter (source: EV-Volumes) recovering strongly after COVID-19 related interruptions.

Optimism towards the lithium market has been bolstered by the European EV sales, underpinned by supportive policy and subsidisation. Since 2018 the Chinese market has been in a state of malaise following ongoing reductions in the value of EV subsidisation. However, several positive factors appeared during the quarter to help improve sentiment in the Chinese market.

After 12 consecutive months of year-on-year (YoY) declines in NEV sales, China reversed its downward trajectory recording growth during July, August and September of +23%, +28%, +73% yoy respectively (source: CAAM). Most notably, September NEV sales of approximately 138,000 were the highest on record. Ebus sales also began to improve achieving YoY sales growth of ~79% in September. The quarter started positively as China's Ministry of Industry and Information Technology (MIIT) announced a plan to promote NEV sales in rural areas requiring all related local governments to cooperate.

Historically NEV sales have been concentrated in metropolitan areas where the comparatively lower driving range of most Chinese models is not as prohibitive. However, the Chinese government's focus on building EV infrastructure and improving battery performance standards allowing for greater presence of international EV makers continues to make rural markets increasingly feasible for EV use. In addition to this measure, the MIIT announced in early October a target of 80% electrification of public commercial vehicles such as buses and taxis.

Improved Chinese demand comes at a time when seasonality plays a big part in domestic supply. Historically, domestic production contracts ~30-40% from peak levels tapering from October through to the end of Chinese New Year, as very low temperatures in the regions where Chinese brine is produced hinders both operations and logistics. Chinese brine supply is typically fed into the carbonate market rather than hydroxide. In addition, growing usage of LFP cathode in the Chinese EV and energy storage market has lifted demand.

Collectively these supply and demand factors and lower inventory levels among domestic producers have led to marginal improvements in the Chinese carbonate spot price in recent weeks. It is too early to predict whether such positive momentum can be maintained as aggressive pricing from South American producers is likely to continue with market share and volume objectives expected to drive sales behaviour as 2020 comes to a close.

Continued improvements in market sentiment and continued destocking from record levels in mid-2020 will require sustained momentum from European and Chinese EV markets, alongside supply discipline from marginal converters and their Chinese or Australian feedstock suppliers.

Following the easing of COVID-19 restrictions, Germany and France's EV sales grew 100% and 50% respectively year-on-year in May demonstrating the immediate impact of new subsidies on consumer EV appetite. During the quarter there were further announcements of battery and EV manufacturing partnerships, and even retooling of production facilities from ICE production to EVs.

On a global basis the lithium market has suffered a setback due to COVID-19, however the medium to long term outlook remains positive and continues to be further reinforced with increasing government regulation and funding.