Lithium: Activity continues apace in Australia, but a market cyclone approaches

Pilbara Minerals

After announcing first production of concentrate fines in late June, Pilbara recently reported first coarse concentrate production. Focus now turns to the balance of commissioning, plant optimisation and production of on-spec concentrate, with the first shipment of Pilgangoora concentrates due in August. Pilgangoora neighbour Altura Mining also reported first concentrate production, with the batch “show[ing] a concentrate product grade exceeding the industry benchmark SC6 specifications and comfortably within those required by the company’s off-take agreements”.

It is Altura’s off-takes that have generated the more significant news, however, with the ASX questioning the ability of Shaanxi J&R Optimum Energy to fulfil its obligations. Optimum has been impacted by the shift in China’s new energy vehicle (NEV) incentives to favour higher energy density cells, which are not currently produced by the company, resulting in a decline in orders, suspension of orders and financial losses. Altura responded saying it expected Optimum to fulfil the contract, and that Optimum had reported to the SSE it could on-sell the concentrate. Optimum’s conversion subsidiary in Cangzhou, Hebei is operational and awaiting first concentrates, but with its captive customer in trouble, most other major converters tied into Altura’s competitors, and Altura’s other off-taker Lionergy still constructing its plant in Inner Mongolia, investors are right to be concerned that output may not find a home, or worse, be paid for.

On the other side of the rails, Mineral Resources reported production of DSO in Q2 2018 at 845,000wmt, and shipments of 754,000wmt, down 27% and 21% respectively from Q1 “in accordance with agreed reductions to maximise future product value”. Construction of the 750,000tpy three-stage spodumene processing plant continues, with the first stage module commissioning in Q4 2018. The company is selling off a 49% stake in Wodgina, with bids expected in August.

Roskill view: Electric vehicle (EV) sales in China remain strong, albeit some uncertainty caused by changes to incentive policy in mid-2018. As more mineral projects commission in Australia, however, Roskill sees a market already stockpiling spodumene concentrate (before factoring any DSO that increasingly looks stranded) and becoming significantly oversupplied in 2019 under current projections. This, in the context of falling Chinese spot prices, will reduce margins for converters, many of whom may now be questioning their fixed-price agreements. The experiences of 2013/14 may not be engrained in the memory of many lithium market participants and investors, but 2019 could be far worse. Weather cyclones may not be the only worry in Western Australia into 2019. The impact on refined production, where incumbent suppliers continue to set the beat on supply and prices, will be lessened, although contagion may not be avoided entirely. The long-term outlook for lithium remains robust, but is it longer-term investment or capitalising on a short-term peak that sees FMC spinning off its lithium division, Tianqi and Ganfeng raising large sums in Hong Kong, and Mineral Resources divesting part of Wodgina in H2 2018?

Roskill’s Lithium: Global Industry, Markets & Outlook report was published in June 2018. For more information or to download the brochure or sample pages, click here.

To discuss the lithium market with Roskill, contact David Merriman: merriman@roskill.com or Robert Baylis: robert@roskill.com