Lithium spot prices in China are currently in the doldrums as near-term demand growth has fallen short of expectation. While of less relevance for the market outside China—with the exception of Australian spodumene supply which feeds the Chinese converters—sentiment in the sector has fallen as sharply as prices.
Longer-term, there is still necessity for the industry to deliver sustained supply growth to fuel the next wave of electric vehicle market growth—that driven by economics rather than incentives. However, current spot prices and sentiment are providing limited incentive to develop much of the greenfield capacity currently being evaluated, and that could impact future supply. As shown by the chart below, only one of the lithium projects analysed within our Greenfield Battery Raw Material Projects report generates an IRR above 20% at current prices.
In the evaluation of these greenfield projects, we have used current spot prices as opposed to contract prices ex-China (which are currently at a premium) for refined lithium products. Although project developers will look to establish long-term off-take agreements prior to construction, it seems unlikely, at least in the initial years of operation, that they will be able to command the same pricing levels as established major producers, which currently dominate the contract market and have an established record of delivering proven battery-grade product, therefore being more susceptible to spot pricing.
Given the current unsustainable situation, and limited risk reduction potential through lack of price transparency, we expect a recovery in lithium spot prices to be necessary to support the development of new capacity, even though contract prices are healthier. Furthermore, the analysis above is based on estimates put forward within technical reports, which by their nature are often representative of a ‘best case scenario’ for items such as capital expenditure, operating costs and utilisation rates (particularly over their initial years of production). This optimism is arguably more significant within the lithium industry, where there is a lack of experience in developing new supply, as well as few recently developed operations to benchmark greenfield projects against.
With this in mind, we have flexed some of the project assumptions above to build in a 25% overspend in capex and a plant utilisation rate 15% below capacity. As shown below, this makes the above analysis look even more ominous.
A portion of the new supply required in future will be met via brownfield expansions at existing producers which, in many instances, provide stronger returns on investment than their greenfield counterparts analysed here. However, we remain sceptical of the ability of these (few) assets to generate the sustained levels of supply growth required to meet the rise in demand over the medium to long-term.
Furthermore, it’s arguable that lithium projects need to provide better investment incentives than other mining projects, not only to support lithium’s aggressive medium-term growth profile but also, and perhaps more importantly, to cover the uncertainty shrouding lithium demand over the long-term. This principally relates to developments in EV powertrain technologies, which not only could shift demand within lithium (i.e. from lithium carbonate to hydroxide or, potentially, to another form of lithium) but could even eliminate its requirement altogether.
Picture credit: Australian Mining
Roskill’s Lithium cost model service provides an in-depth analysis of the lithium supply chain, from the discovery of new mineral resources through to the production of battery grade material. This analysis is critical in the evaluation of new lithium supply, as well as in accessing the security of supply from existing sources.
Roskill’s Lithium: Outlook to 2028 report and Greenfield Battery Raw Material Projects for the 2020s report were published in mid-2019.