Analysis of Lithium Supply and What is the Bottom of Lithium Price

Analysis of Lithium Supply and What is the Bottom of Lithium Price

Many friends before asked about the supply and demand situation of lithium and what is the approximate range of lithium prices? Today, let's talk about lithium supply and also talk about what I think is the bottom area of lithium prices.

Firstly, let's take a look at where the main global lithium supply currently comes from. According to data from the United States Geological Survey, in 2022, Australia accounted for 47% of the global supply of lithium resources in production. Chile and Argentina's salt lake lithium account for a combined 35%, making it the world's main lithium supply region.

I will first post the global lithium supply and demand table here. As I mentioned in the previous lithium supply and demand analysis, the data in this table is actually similar to the industry forecast. Anyway, the industry consensus is that there will be a 20% oversupply in 2024 and 2025.

My framework for speculating on the bottom of lithium prices is as follows: since the cost of lithium in global salt lakes is relatively close, about 40000 yuan per ton, which is much lower than the cost of other lithium sources, the cost of spodumene and lithium mica determines the price of lithium, which together account for about 60%.

We want to know the bottom price of lithium, but it mainly depends on the cost of Australian lithium mines, as Australian lithium mines account for over 40% of the global supply and 80-90% of the global supply of spodumene. So starting with the operation of lithium mines in Australia, let's take a look at the situation of major mines in Australia and their cash costs to estimate the bottom of lithium prices. When will the price of lithium carbonate fall below the cash cost of Australian lithium mines, and when will lithium prices hit bottom.

1、 Situation of lithium mines in Australia

There are a total of 8 lithium mines in Australia, and it cannot be said that 100% of Australian lithium mines come from these 8 mines, at least over 95%. I have listed the current production capacity and future plans of these 8 mines in the following chart.

Some friends may not be familiar with these mines, but I will briefly talk about the situation of the mines here.

Greenbush

Greenbushe, this is Tianqi Lithium's mine. In fact, the current major shareholder is Yabao. Tianqi Lithium used to hold 51% equity, but due to the previous downturn in lithium prices, Tianqi Lithium was forced to sell 25% to IGO due to financial crisis, losing control and now only holding 26% equity. This is the highest quality mine in Australia, built early and mature, with the lowest cost.

Now, in addition to the planned No. 3 500000 ton lithium concentrate plant, a tailings reprocessing plant (TRP, 280000 tons/year) is also under construction, but the production capacity is not high and belongs to tailings reuse. The third chemical grade plant (500000 tons/year) is expected to achieve its first extraction in mid-2025, so the actual production capacity may be in 2026, so Greenbush's production capacity will not change much in the next two years.

The company disclosed a cost guideline for lithium concentrate for the fiscal year 2023 of AUD 225-275 per ton, with an actual cost of AUD 279 per ton.

Pilgangoora

Pilbara is also a lithium mining company that collapsed during the previous wave of lithium mine downturn. Pilbara completed a debt swap in the third quarter of 2019, not only surviving the industry downturn, but also successfully integrating neighboring Altura, becoming a crucial large-scale lithium mining resource provider in Western Australia.

The company's current P680 project has added 100000 tons of lithium concentrate production capacity. Trial operation will begin in the third quarter of 2023, but it will not reach production until the fourth quarter of 2024. It will also take one year for the Australian lithium mine to reach production.

The P1000 project is planned to be put into operation in the first quarter of 2025, with a production capacity of 320000 tons. P1000 refers to the company's total lithium concentrate production capacity reaching 1 million tons per year. The P1000 project is estimated to reach production by 2026. In this way, the Pilgangoora mine has become the second ranked mine in Australia.

The company disclosed a cost guideline for lithium concentrate for the fiscal year 2023 of $420 per ton.

MtMarion and Wodigna mines

Australian mining service provider Mineral Resources Limited (MRL or MinRes for short) has two major advantages: one is the Mt Marion lithium mine (MRL and Ganfeng each hold 50% equity), and the other is the Wodgina lithium mine (MRL holds 40% equity and Yabao holds 60% equity).

The MtMarion mine is an old brand mine, with Marion lithium concentrate products divided into 5.4% (originally 6%) and 4% - high and low grades. The mine's grade is not very stable, and the current lithium concentrate production capacity of 600000 tons/year has not met expectations, only 300000 tons. The future depends on technological transformation. The ultimate goal is to expand production to 900000 tons per year. At present, nearly 80% of the area within the Mt Marion mining rights area has not been explored, which also has the potential to enrich mineral resources.

The revised cost guidance for MtMarion lithium concentrate in the 2023 fiscal year provided by the company is AUD 1200-1250 per ton (SC6, FOB).

The mining plan of Wodgina mine has been suspended during the period of low lithium prices in the previous wave. Wodgina's resumption of production began in the second quarter of 2022 and is currently under orderly development, making it a crucial mine in Australia in the future. The reserves of Wodgina mine are relatively large, with a planned production capacity of 750000 tons/year of lithium concentrate. It should reach production by mid-2024, and the production capacity is also relatively large. By the way, shareholder MRL intends to increase its equity stake in the Wodgina lithium mine from 40% to 50%, thus forming a 50/50 joint venture pattern.

In June 2023, the company disclosed that the cost guidance for Wodigna lithium concentrate for the fiscal year 2023 had increased to 925-975 Australian dollars per ton (SC6, FOB)

Mt Cattlin

Allkem was formed by the merger of Australian lithium resource company Orocobre and Galaxy Resources, and owns the lithium mine Mt Cattlin in Western Australia and the salt lake Olaroz in Argentina.

The lithium concentrate production capacity of Mt Cattlin mine corresponds to about 30000 tons of lithium carbonate, but in recent years, the mine has faced challenges such as declining grade and resource depletion, unstable production and yield, and no plans to expand production in the future. The current main task is to extend the lifespan of the mine through open-pit mining.

The cash cost disclosed by the company for the second quarter of 2023 is $830/ton, and it is expected that the average cash cost for the whole year of 2023 will be $909/ton (FOB).

Finniss

Finniss Lithium, a subsidiary of Core Lithium, is the only Greenland Lithium project to be put into operation in Australia in 2022. In March 2022, engineering service provider Primero will start the construction of a gravity separation production line, with a designed annual production capacity of 173000 tons of 5.8% grade lithium concentrate (with a maximum annual production capacity of 197000 tons). The company has signed underwriting agreements with Yahua and Ganfeng, and the production volume has been basically locked in.

The cash cost disclosed by the company in the first half of 2023 is AUD 1230 per ton.

According to the expansion plan of the above-mentioned mine, the production capacity of 8 tons of lithium concentrate is calculated as 1 ton of lithium carbonate. After converting the lithium concentrate production capacity into the cost of lithium carbonate production capacity, the summary is as follows:

It should be noted that the corresponding production capacity in the table is optimistic because the actual production capacity often does not meet expectations.

2、 Calculating the selling price of lithium carbonate based on the cash cost of Australian lithium mines

The bottom of the lithium mine should be near the cash cost of the Australian mine. If it is lower than the cash cost, it indicates a loss of cash flow. Under normal circumstances, production will stop at this time, otherwise it will increase the loss.

In addition to cash costs, the Australian government also charges equity fees to lithium miners. According to Australian mining laws, the Australian government charges an equity fee of 5% of sales revenue to lithium miners. So the most basic cost calculation is the cash cost of the mine plus equity funds.

The cash cost statistics for the aforementioned Australian mines are as follows:

Source: Public information, financial reports of various companies Some companies are denominated in Australian dollars, while others are denominated in US dollars

The cost calculation method for lithium carbonate is as follows

1. 1 ton of lithium carbonate is produced from 8 tons of lithium concentrate (5.5% grade) recognized in the industry, with a shipping cost of $30 per ton of lithium concentrate and a manufacturing cost of RMB 25000 per ton of lithium carbonate.

2. We calculate the cost of producing lithium carbonate from lithium concentrate by adding 5% to the cash cost of lithium concentrate, and based on this, we calculate the cost of producing lithium carbonate from lithium concentrate.

3. The exchange rate between the US dollar and the Chinese yuan is calculated at 7.1.

The cost of producing lithium carbonate from Australian lithium concentrate (cash cost+equity gold) is as follows:

From the above figure, it can be seen that when calculating raw materials based on cash costs, Greenbush has the lowest cost, less than 40000 per ton. The average cash cost for producing lithium carbonate from Australian lithium mines as raw materials is 60000 yuan per ton, compared to 50000 to 70000 yuan per ton for other mines. At a price of 60000 yuan per ton of lithium carbonate, the Australian lithium mining industry is actually losing money, which means that the price of 60000 yuan per ton of lithium carbonate is unsustainable.

The selling price of 60000 yuan/ton lithium carbonate can be seen as the bottom of this round of lithium prices, because cash costs are not comprehensive costs yet. The operating expenses, finance, and various taxes of these mining companies are all included, and these costs will increase by at least 10-20000 yuan on this basis. So, 70000-80000 yuan/ton of lithium carbonate is the minimum guarantee for maintaining industry operation.

3、 Lithium production in other regions

Apart from Australia, there are also South American salt lake lithium and African spodumene. The production capacity of South American salt lake lithium is also quite clear (I won't go into detail here), with an annual increase of about 100000 tons in 2024 and 2025. Africa is the largest variable in the next two years, and here we mainly talk about the development of lithium mines in Africa. Africa, as the region with the most investment from Chinese mining companies, is a virgin land that Australia and China cannot go to, and South America also faces obstacles. In contrast, Africa is the biggest opportunity.

I will summarize the situation of African mines here for your reference

Convert the lithium ore above into lithium carbonate, and summarize as follows:

Several major mines in Africa are operated by Chinese companies, such as BIKITA, which was developed by China Mining Resources and put into operation by the end of 2023, with a production capacity equivalent to 40000 to 50000 tons of lithium carbonate. Arcadia from Huayou Cobalt has already been put into operation, with a planned production capacity of 50000 tons of lithium carbonate. The production of Goulamina from Ganfeng Lithium is also not low.

So overall, in 2024 and 2025, Australia will have an annual increase of 100000 tons, South America will have an annual increase of 100000 tons, Africa will also have an annual increase of 80000-100000 tons, and China, Europe, and the Americas will add up to over 100000 tons, resulting in an annual increase of 400000 tons. This is the approximate expected increase in lithium mining at present.

4、 Industry Inventory and Market Regulation

We need to consider the factor of industry inventory. Most of the time, when lithium prices rise, downstream companies will actively stock up. You see, 2022 is like this. At that time, downstream inventory will continue to rise because they are afraid that rising lithium prices will increase costs. When lithium prices fall, they will actively clear inventory. Like now, companies and individuals are similar at this time, buying up instead of buying down. This leads to downstream inventory actually contributing to the decline in lithium prices. Downstream smelting inventory will continue to decrease from 100000 tons last year, and it is also possible for it to fall below 50000 in the future. The excess inventory from this reduction will also adjust the increment. Here is the recent industry inventory situation:

The idea is just to destock downstream. Upstream mines also have inventory, and the inventory is larger, about 200000 tons. destocking is similar, as it can increase the amount of lithium carbonate by 100000 tons during a downward cycle.

Both supply and demand sides will self regulate. Once there is a significant surplus, the supply side will think that they cannot make money to reduce production capacity, and high cost production capacity will be shut down. There is no way to do this. Running a business is just to make money, and if we lose money now, will we still stick to the downstream? There is no Lei Feng now. Even if low-cost miners may not stop production at meager profits, will the previously ambitious expansion plan of male employees slow down or reduce the plan? This is constantly adjusted by both the supply and demand sides based on prices, so don't expect an accurate supply and demand table, as this thing is constantly changing.

With so many mines, the supply data calculated by everyone now is based on the planning given by the mines. If the price drops significantly and it reaches the cost price, these mines will also make adjustments to reduce production. The original planned quantity is likely to decrease. After 1-2 years of adjustment, supply and demand will reach a new balance, which is the stage from surplus to new balance.

If the equilibrium stage is maintained continuously, then the price will definitely maintain a level that is acceptable to both parties. For example, the bulk commodities such as oil and copper that we see are like this. However, when we reach equilibrium again, if demand suddenly erupts in one year and unexpected situations occur for both parties (such as the 1.7-fold growth of new energy vehicles in China in 2021), the price will rise. Moreover, due to the long time required for lithium mining, it is impossible to supply after breaking the balance, so it will rise again and again.

5、 A digression on lithium supply and demand

Since everyone is calculating supply and demand, can we make money with a supply and demand table? In my opinion, the effect is not significant. You can take a look at the lithium mine supply and demand tables made by institutions over the years. Based on my many years of experience, what I have seen is that when lithium prices fall, the supply and demand tables are all surplus, and when lithium prices rise, they are all scarce. If you look at the supply and demand tables made by various institutions before lithium prices rise from 2019 to 2020, they are all surplus. When lithium prices rise later, they adjust one after another and turn the surplus into a shortage.

The reason is that these data are all calculated by people. From a low price to an initial price increase, it is certain that the price will only increase when it is in short supply. What should we do? Adjust the data and increase the demand a bit, but not too much. What if we make a mistake? Wait until the price keeps rising, then increase the demand a bit more, so the supply and demand table you see seems very detailed, but that's actually the case. There is nothing forward thinking.

summary

1. Now is the low point of the cycle, and everyone likes to use cost to predict the bottom of lithium prices. I partially agree with this viewpoint because during the low point, there is excess supply, and cost can only be used to estimate the bottom price. However, when lithium prices rise, no one uses cost to predict. At that time, everyone was looking at the increase in demand.

2. Usually, investment thinking is divided into three levels: the first level is based on the present, which means that all public information is currently available, in order to decide investment; The second layer is based on the future, which is to construct the most likely future scenario based on the current known information to make decisions; The third layer is based on future expectations, leading the opponent on the basis of reasonable speculation about the future. Some people say there are fourth and fifth layers, but it can be said that there are countless layers, but the meaning is the same, they are all expectations above expectations. In fact, when it comes to the third layer, it is enough. The Taoist saying "one life two, two lives three, three lives all things" may be this truth. From an investment perspective, one should not stay at the first level and focus solely on existing information, such as spot prices, futures prices, etc. These information are transparent and everyone knows that there is no expectation difference. When you say that relying on this information to play games, the advantage is not significant.

3. It is said that investing is a combination of science and art. I think conducting research and analysis should actually lean more towards science (rationality), while conducting transactions may lean more towards art. You are just doing futures trading, focusing on operations, but understanding the depth of research and analysis is the key to understanding the depth of the underlying game. So my approach to writing articles is to let science belong to science and art belong to art.

4. When will there be a significant increase in lithium prices? Nowadays, everyone is talking about the sharp drop in lithium prices, looking for reasons in the context of the decline, but the reasons for the rise have actually existed. The reason is that the global electrification wave has just begun, and this is an irreversible process. The global penetration rate of electric vehicles is less than 15%, and energy storage is just beginning, belonging to a 0-1 process. You should know that energy storage corresponds to the change in the global energy landscape, and the amount of energy stored in the next 10 years is likely to exceed that of electric vehicles. What a big market do you think this is! In the future, all machinery will undergo an electrification process.

The status of "white oil" has not yet been revealed. In the future, organizations like OPEC may emerge in Australia and South America, which is likely to occur because it is in line with regional interests maximization. At that time, these two regions would monopolize more than 60% of the world's lithium. Is it possible that the global lithium resources would be the second oil?

5. Reasonably imagine that the current annual consumption of lithium carbonate is around 1 million tons, but in 3-5 years, this consumption will reach 2-3 million tons. Now everyone is thinking about whether lithium carbonate will reach 50000 tons next year, but in 3-5 years, perhaps 200000 tons will also be considered reasonable. All expected deviations mainly come from the occurrence of unexpected events, but no one knows when unexpected events will occur. Although I have written about the possibility of unexpected situations, I tend to believe that unexpected events are basically unpredictable.

6. The industry needs to emerge from a downturn, and the decline in lithium prices is inevitable. The more severe the decline, the more it will suppress the industry's production capacity, and in the future, the price will rise even more fiercely. One of the fundamental reasons for the significant increase in lithium prices from 2020 to 2022 is that lithium prices fell too sharply from 2018 to 2019, which suppressed production capacity. So, although I don't think the lithium price will continue to be below 60000 yuan per ton, it is also very likely to fall below this price under irrational market conditions, and when it falls below this price, one should feel fortunate, as explained abov