3、 The growth of lithium supply is relatively slow, and the production volume is likely to be lower than expected

3.1 Blooming Flowers, Rapid Development of Lithium Resource Extraction Technology

Lithium extraction from spodumene is currently one of the most mature lithium extraction methods in terms of process technology. The production process of lithium salts is mainly divided into four types based on different raw materials, namely lithium extraction from spodumene, lithium extraction from mica, lithium extraction from clay (not yet commercialized), and lithium extraction from brine. The lithium extraction technology from spodumene has undergone decades of development and is the most mature process. Using spodumene as raw material, battery grade lithium carbonate or battery grade lithium hydroxide can be produced with the highest product quality. The extraction methods of spodumene mainly include sulfuric acid method, lime sintering method, soda ash pressure boiling method, and sulfate method. Taking the production of lithium carbonate by sulfuric acid method as an example, first, high temperature is used to convert spodumene from structurally stable alpha type to easily reactive beta type, and then concentrated sulfuric acid is added to dissolve it. By adjusting the pH value, other metal ions besides lithium ions are gradually precipitated and separated. Sodium carbonate is added to the lithium ion solution, and the precipitate is filtered to obtain lithium carbonate.

The process and downstream demand determine that the production capacity of Australian spodumene mines requires additional attention. The current production of lithium extraction from spodumene is higher than that from salt lakes and mica. Among the three processes, the lithium extraction from spodumene is the most mature. Compared with salt lakes, the production cycle of new mines is shorter. On the other hand, many mature lithium mines in Australia have room for expansion, and the production cycle of suspended projects is also shorter, with greater supply elasticity. From a product perspective, spodumene concentrate can be used to produce lithium carbonate and lithium hydroxide. The quality of lithium carbonate produced from spodumene and lithium hydroxide produced by causticization is also high. However, the production of lithium carbonate in salt lakes has a long way to go from the crude lithium stage (60-70% content) or industrial grade lithium carbonate stage, and the process of lithium extraction from salt lakes to produce lithium hydroxide still has a long way to go. From the perspective of downstream consumption, lithium carbonate can be used as a positive electrode material for lithium iron phosphate and low to medium nickel positive electrode materials (NCM 111, 523, 622), but high nickel ternary materials such as NCM811 and NCA must use lithium hydroxide. Currently, the production technology of lithium hydroxide from spodumene ore is the most mature. In the competition between ternary and iron lithium routes, the conversion of lithium salt product types is flexible.

Technological progress and cost reduction have brought the extraction of lithium from mica into reality. Although there are abundant resources of lithium mica in China, the extraction of lithium from mica was not optimistic before 2019, mainly due to technical and cost challenges. Firstly, the composition of lithium mica is complex (KLi1.5Al1.5 [AlSi3O10] (F, OH) 2), mainly composed of lithium, potassium, silicon, aluminum, and fluorine. It is more difficult to extract raw materials and purify lithium salts, especially in the process of fluorine production, which corrodes equipment and makes production discontinuous. Therefore, the cost of lithium extraction from early mica was high and the product quality was poor (mainly industrial grade); Secondly, the grade of lithium mica concentrate is low, with a Li2O content typically ranging from 2.0% to 3.5%. To produce 1 ton of lithium carbonate, approximately 18-19 tons of lithium mica concentrate (calculated at a grade of 3.0%) are required, which is 2.4 times the consumption of spodumene concentrate and generates a large amount of smelting slag that is difficult to handle. Therefore, the extraction of lithium from mica was almost ignored for a considerable period of time. Technological breakthroughs bring expectations into reality. With the continuous efforts of the industry and academia, the mica lithium extraction technology has been continuously improved and matured. It has made progress in several aspects such as roasting, fluorine fixation, increasing leaching rate, and composite salt recovery, effectively solving the problems of long process, high energy consumption, and equipment corrosion in traditional processes. It has achieved the goal of efficiently and economically extracting battery grade lithium carbonate from lithium mica ore. After industrialization, with the improvement of scale efficiency, the industry cost has further decreased. One prominent advantage of using mica to extract lithium is that there are many by-products. By recycling by-products such as feldspar powder and quartz, there is further room for cost reduction.

Salt lake lithium extraction technology is diverse, with one strategy for each lake. There is no universally available technology for lithium extraction from salt lakes. Different lithium extraction process routes are adopted based on the differences in salt lake endowments and infrastructure conditions. The process of lithium extraction from salt lakes can be simply divided into the lithium extraction stage (enrichment, separation, concentration) and the lithium precipitation stage. The core of the technology mainly lies in lithium extraction, and the final lithium precipitation stage is relatively mature and homogeneous. At present, six major lithium extraction technologies have been developed, including precipitation method, solar cell method, extraction method, calcination method, adsorption method, and membrane method (including electrodialysis and nanofiltration membrane separation method). Evaporation precipitation is the most traditional method for preparing lithium carbonate, which is suitable for low magnesium lithium ratio salt lakes. The original brine is evaporated by large areas of salt fields to produce concentrated brine. After separating potassium and sodium salts, lime is added to separate magnesium and remove impurities. Chemical reagents are added for precipitation, and lithium carbonate is prepared by filtration and purification; The evaporation stage of salt fields is affected by natural environment, climate and weather, and the sun drying brine generally takes 1-2 years, with a long cycle. It also requires the construction of a large number of salt fields, consumes a large amount of alkali, has a low recovery rate, and has the advantage of fully utilizing the abundant solar and wind energy in the mining area, resulting in low production costs.

Breakthroughs in new technologies and gradual industrial application of combined processes. In the new generation of salt lake lithium extraction technology, "brine lithium extraction" has begun to receive attention. Lithium extraction is carried out first, and then potassium extraction is carried out in the salt field. The core advantage is that the lithium extraction cycle is significantly shortened (brine only needs pre-treatment), and large-scale construction of salt fields is not required. However, brine lithium extraction requires high-performance adsorbents with large adsorption capacity and low solubility loss. Different adsorbents need to be developed for different types and concentrations of brine; Secondly, the adsorption of brine requires more complete basic conditions such as electricity and fresh water, and requires greater investment in high-altitude and underdeveloped areas. With the maturity of various adsorption, membrane separation, concentration, and extraction technologies, salt lake lithium extraction will gradually shift towards "continuous industrial production". In the future, the commercialization of new generation technologies such as "brine lithium extraction" will significantly improve the production efficiency and share of global salt lakes. In addition, due to the advantages and disadvantages of each process route, a combination of multiple technical routes is often used in actual production.

3.2 Natural and historical constraints lead to insufficient supply elasticity

Australian lithium mines and South American salt lakes are the main sources of global supply. The concentration of lithium resources on the supply side is relatively high. Thanks to their resources and first mover advantage, Australian mines and South American salt lakes have always been major suppliers globally, supplying approximately 80% of raw materials. According to USGS estimates, Australia accounted for 55% of global lithium production in 2021, making it the world's largest lithium supplier, followed by Chile with 26%. Australian lithium mines and South American salt lakes play a decisive role in the global supply of lithium resources. The supply of lithium resources in China has increased in recent years, but raw materials are still limited to overseas markets. In the early stages of lithium resource development in China, salt lakes were the main focus. In recent years, the development and construction of spodumene and lithium mica have begun to accelerate. However, on the one hand, the resource development cycle is long, and the speed of capacity release is slow. On the other hand, the scale of China's resource projects is difficult to compare with high-quality overseas resources, and the growth of China's lithium resource supply is relatively slow; At the same time, China has concentrated most of the global lithium salt production capacity and is continuously growing, resulting in a high dependence on external resources.

Abundant total resources do not equate to abundant immediate production capacity. There are natural barriers and constraints to resource development, and multiple factors lead to slow capacity release. Resource development starts from mineral exploration, goes through pre survey, general survey, and detailed survey to determine reserves. Mining projects may take about 5 years from the green space stage to reserve verification. Subsequently, after multiple stages such as economic evaluation, feasibility study, mining rights processing, government approval, and project financing, the mining project will begin formal construction, which may take 1-3 years or even longer. Due to the fact that mining resources are mostly located in uninhabited areas with poor infrastructure conditions, the preliminary construction work of transportation, water and electricity takes a long time, and project construction and production are easily disturbed by climate, environment, and community relations, with many uncertain factors. Depending on the actual conditions of the mine, the construction period may take 2-3 years. Depending on the level of the mine's three connections, the depth of the ore body, and the difficulty of construction, the mining construction time may even be longer. Therefore, the most "expected" thing is that the progress of the mining project "falls short of expectations".

3.3 Capacity release is likely to fall short of expectations, and the tight supply pattern will continue

The uncertainty of project construction is high, and project production is not equivalent to reaching production capacity. The actual supply and release speed and quantity of lithium may be significantly lower than market expectations. In terms of the pace of global lithium supply release, the increase in supply before 2023 is mainly due to the expansion of ongoing projects and the resumption of production of suspended projects, with relatively fast progress and high certainty; Due to the long cycle of resource development and the impact of the sharp drop in lithium prices from 2019 to 2020 on capital expenditure progress, investment in lithium mining projects has accelerated since 2021. Therefore, most new lithium mining projects will not be completed and put into operation until 2023-2024, with more production released in 2024. The uncertainty of new and put into operation projects will greatly increase. Similarly, the production time of new salt lake projects is concentrated in 2024 and beyond, with expansion of existing salt lakes such as SQM and ALB being the main focus. Therefore, in terms of rhythm, the progress and speed of expansion and resumption projects are relatively fast, with a high degree of certainty in the release of production capacity. However, as time goes on, the number of newly built production capacity increases, and the increase in uncertainty will bring about uncertainty in the release of supply. The actual release quantity and time of production may be significantly lower than expected.

In the short term, the growth of lithium mine supply in Australia is expected to see the resumption of production in mines that have been shut down, while in the medium and long term, there will be fewer new projects and the expansion of existing mines. The number of mines built globally is limited, and the supply of spodumene concentrate is mainly concentrated in Western Australia. Only seven lithium mines have been built in Australia, including Greenbushes Lithium Mine of Tianqi Lithium, Marion Lithium Mine of Ganfeng Lithium, Wodgina Lithium Mine of Albemarle (ALB), Pilgangoora Lithium Mine of Pilbara (PLS merged the original Pilgangoora mining area with the acquired Ngungaju mining area), MT Cattlin Mine of Galaxy Resources (GXY, acquired by Orocobre in 2021), and Bald Hill of Alliance. As of the end of 2021, there were four lithium spodumene mines in production in Australia (Greenbushes Marion、Pilgangoora、Cattlin）， Two mines (Ngungaju, Wodgina) are waiting to resume production, and one mine (Bald Hill) that has been shut down and has no plans to resume production. The total lithium concentrate production capacity of the seven mines is about 3.5 million tons. The actual production in 2021 is about 1.9 million tons of lithium concentrate, equivalent to approximately 241000 tons of LCE, accounting for more than 70% of the global lithium ore production capacity (including lithium pyroxene, mica, transparent lithium feldspar, etc.), and about 90% of the global lithium pyroxene resource supply. Australian lithium pyroxene concentrate is the main source of imports for China.

Among the seven mines already built in Australia, three have plans to expand production recently, namely Greenbushes and Marion. Greenbushes currently has a lithium pyroxene concentrate production capacity of 1.34 million tons per year, with a production capacity of 954000 tons in 2021. The production capacity is expected to further increase to over 1.2 million tons in 2022. At the same time, a tailings recovery project with a concentrate production capacity of 280000 tons per year will be put into operation, with a production capacity of 1.62 million tons per year in 2022. In the long run, Greenbushes also plans two production lines with a production capacity of 520000 tons per year; Marion's original production capacity of spodumene concentrate was 450000 tons per year, which has been expanded to 600000 tons per year in the first half of 2022, and further expanded to 900000 tons per year by the end of 2022. However, due to the increase in the proportion of low-grade concentrate in the product, based on constant grade conversion, the actual increase is only about 150000 tons of spodumene concentrate, equivalent to about 20000 tons of LCE, and the actual production volume will be increased in 2023. The lithium concentrate production capacity of Pilbara's Pilgan Plant has been increased from 330000 tons/year to 360000 to 380000 tons/year, with plans to add another 100000 tons/year of lithium concentrate production capacity by the fourth quarter of 2023 (with production released in 2024). Combined with Ngungaju's resumed production capacity of 180000 to 200000 tons, the total production capacity of Pilbara will reach 640000 to 680000 tons/year.

Before the large-scale development of lithium resources, global supply was mainly provided by South American salt lakes. The scale of South American salt lakes is crucial globally, accounting for 67% of the global lithium extraction from salt lakes in 2021, with China accounting for 31%. At present, there are only three salt lakes built in South America, namely Salar de Atacama Salt Lake (developed by SQM and ALB in different regions), Hombre Muerto Salt Lake (operated by Livent), and Salar de Olaroz Salt Lake (operated by Orocobre). Therefore, these three salt lakes are known as the "three lakes and one mine" along with the Greenbushes mine in Australia in history. ALB, SQM, and Livent are also well-known BIG 3 in the lithium industry and are the global leaders in salt lake lithium extraction, all with a history of more than 20 years of operation. From the perspective of lithium extraction from salt lakes alone, SQM has the largest scale, followed by ALB, and Orocobre is a newcomer in the lithium salt industry.

The growth of salt lake production capacity in South America is concentrated in the expansion of existing enterprises. Both SQM and ALB's salt lakes in South America have plans to increase or expand production, both within their respective Salar de Atacama mining rights. SQM has advanced the 180000 ton expansion plan originally scheduled to be completed by the end of 2023 to 2022, with an expected output of 140000 tons in 2022. ALB has increased its production capacity by 40000 tons, and is expected to reach 85000 tons per year in the first half of 2022. Livent has restarted its expansion plans in Argentina and North America, while Orocobre has announced a merger with Galaxy Resources, which will have synergies in the future construction of salt lake projects in Argentina. The expansion pace of lithium extraction enterprises in South American salt lakes is accelerating, but the production capacity of the above projects will be released as early as the second half of 2022. The high certainty of supply increment may only come from SQM, which cannot alleviate the current tight supply situation.

Outside the lithium triangle in Australia and South America, the amount of lithium resources produced overseas is scarce. Before 2021, only Mibra mine in Brazil and Bikita mine in Africa were in production outside of Australia, with a concentrate production capacity of 90000 tons per year. The former recovered lithium from tantalum niobium tailings, while the latter produced lithium feldspar with a Li2O grade of 4.3%, which did not enter the battery supply chain. Mibra plans to expand to 130000 tons per year, with production scheduled for 2023; Bikita plans to first expand the mining scale from 700000 tons/year to 1.2 million tons/year, and then add 2 million tons/year of mining scale. Tanco in Canada resumed production in 2021, with a mining and beneficiation scale of only 120000 tons per year. The plan is to expand production to 180000 tons and build a new scale of 1 million tons. The project is scheduled to be completed by 2024, and the output release will be in 2025.

Africa: The main arena for the next round of lithium resource development. Africa has abundant lithium mineral resources, but the development progress is slow. The proven lithium mineral resources in Africa are mainly distributed in countries such as the Democratic Republic of Congo, Zimbabwe, and Mali, among which the Manono lithium mine, Goulamana lithium mine, and Arcadia lithium mine are all world-class lithium mineral resources. However, due to insufficient early exploration and lack of funding, the overall progress of lithium mining projects in Africa has been slow. Except for the Bikita mine, all other projects are in the feasibility study or early exploration stage. According to current statistics, Africa has a clearly planned lithium concentrate production capacity of nearly 200000 tons of LCE, which will become an important component of global lithium supply after completion. However, the infrastructure is relatively backward, and the release of production will take time.

China is an important component of global lithium resource supply. The acceleration of China's supply depends on mica, the cost and volume depend on salt lakes, and the future potential depends on spodumene. There are currently three paths for China to develop lithium resources: Qinghai Tibet lithium salt lake, Sichuan West spodumene, and Jiangxi lithium mica. Due to the fact that the approval of lithium mica mining rights is at the local level and the policy approval speed is relatively fast, coupled with the fact that most mines are developed in open-pit mines and the construction period of mines is relatively short, the project volume is rapidly increasing, making it a type of resource development in China that can see an increase in supply within one or two years; However, the ecological fragility and environmental capacity of the Qinghai Tibet region are relatively small, and the approval process is cautious. The infrastructure facilities of the Qinghai Tibet Salt Lake are relatively poor, and there is a lot of preliminary infrastructure work. In addition, the approval, construction, and production cycles are greatly extended due to the unique technology of each lake. Therefore, the speed is slow, but the advantage lies in the abundant domestic resources and large project volume, which can provide strong support for future domestic resource supply. However, the development of spodumene resources ranks between lithium mica and lithium salt lakes in terms of speed, approval difficulty, and volume. West Sichuan has abundant spodumene resources, while the potential resources of the methyl carbonate deposit can rival those of Greenbushes. Due to historical factors, it has not yet been extensively developed and utilized, but it has great growth potential.

4、 The supply-demand contradiction still exists, and lithium prices may remain high

4.1 Supply elasticity decreases, consumption elasticity increases

The downward elasticity of the supply side is large, and the supply of lithium resources will remain tight in the next two years. The short-term supply increment in Australia, South America and other regions relies on the resumption of production of suspended projects and the expansion of existing projects. In 2023 and beyond, it relies on the release of production capacity from new projects, but the uncertainty of the production time of new projects is significant; Emerging lithium resource development countries such as Zimbabwe, Mexico, Congo, and Brazil are also pushing for some projects, but it is difficult to supply them to the market in the short term. The large-scale implementation of these projects may take place in 2024 and beyond. Therefore, it is difficult for the supply side to grow beyond expectations, and the release of supply in the next two years may not meet expectations or will be a high probability event, resulting in a significant downward elasticity of supply. The proportion of traditional demand for lithium has decreased, while the proportion of lithium battery consumption has rapidly increased. In the downstream consumption structure of lithium, lithium batteries account for as much as 78%, compared to only 42% in 2015. The increase in battery growth mainly comes from new energy vehicles, and the proportion of EV batteries in total lithium consumption has increased from 14% in 2015 to 61% in 2021, and is expected to continue to rise to over 70% in the coming years. The traditional industrial demand for lithium includes ceramics, glass, lubricating grease, casting powder, etc. The demand will steadily increase, but the growth lacks highlights. Its proportion in total consumption has decreased from 45% in 2015 to 19% in 2021, and is expected to further decrease to below 10% in 2025.

The upward elasticity of the consumer end is high, with a CAGR of 30% for lithium consumption during the 14th Five Year Plan period, making it difficult to fundamentally reverse the supply-demand imbalance. Overall, lithium consumption has grown rapidly. In 2015, global lithium consumption was only 180000 tons of lithium carbonate equivalent. In 2020, it exceeded 350000 tons, doubling the total amount and achieving an average annual compound growth rate of 15%. In 2021, it rapidly increased to 580000 tons, achieving a growth rate of over 50%. It is expected that the lithium growth rate will further accelerate to around 30% during the 14th Five Year Plan period, and the total consumption will increase to over 1.6 million tons of LCE. And after several years of cultivating consumer consumption habits, the new energy vehicle market has become relatively mature, and the acceptance of new energy has greatly increased. With the launch of popular models, the process of replacing traditional cars with new energy vehicles will accelerate. If we consider the growth of new market models such as battery swapping and battery leasing, the upward elasticity of lithium consumption is significant. The supply elasticity is downward, while the consumption elasticity is upward. Therefore, the future supply growth rate may be difficult to meet the consumption growth, and the supply shortage may become normalized. The supply-demand contradiction will gradually ease after 2023, but it is difficult to fundamentally reverse it.

4.2 Long term tight supply and demand pattern, prices may continue to remain high

Demand is the fundamental driving force behind the rise in lithium prices. During the period from 2015 to 2017, the new energy vehicle industry experienced a period of explosive development, with rapidly increasing consumption of power batteries. Market demand and optimistic expectations for the future led to booming market transactions, and the price of lithium carbonate quickly rose from 40000 to 170000. At that time, there was no obvious shortage of market supply, but more due to limitations in smelting capacity and low inventory driving prices. From 2018 to the first half of 2020, subsidies for new energy vehicles have decreased, consumption growth has been slower than expected, and previous investments in lithium mines have entered a period of capacity realization. The supply of lithium resources has increased, downstream overcapacity has occurred, and the entire industry chain has been destocked. The supply-demand contradiction has become prominent, coupled with inventory backlog in the early stage, and the price of lithium carbonate has rapidly fallen from 170000 yuan to below 50000 yuan. Lithium prices fell below 40000 yuan/ton in mid-2020, breaking through the cost curve of most Australian lithium mines. Large scale losses in mines led to the clearance of production capacity, and the market supply did not increase but returned to decline, establishing a market bottom. Subsequently, lithium prices rebounded; The price reached 100000 yuan/ton in the third quarter of 2021 and exceeded 200000 yuan/ton in the fourth quarter; Entering 2022, lithium prices are accelerating their rise, surpassing 300000 in January, 400000 in February, and 500000 in March. The fundamental logic behind the rise in lithium prices is that the demand for new energy vehicles has shifted from policy driven to product driven, the automotive industry has completed its shift, the penetration rate of new energy vehicles has accelerated, and lithium demand has entered a stable period of high-speed growth. However, the supply of resources is difficult to increase, which has suppressed the full potential of lithium salt production from the source.

The long-term depletion of inventory leads to a high demand for replenishment in the industrial chain, and lithium prices will remain relatively high. The high prosperity of the industry will continue for several years. In this round of price increases, market inventory has been reduced to historical low levels after long-term destocking, and price elasticity has been amplified under low inventory. In the second half of 2022, domestic positive electrode production capacity will increase, new energy vehicle consumption will recover, new models of new energy vehicles will emerge, and explosive models will emerge. The demand for reserve inventory in the industry chain will greatly increase. Against the backdrop of low inventory, prices will usher in a new round of price increases. The sales of concentrate are mainly based on the underwriting model, which is more likely to accelerate price increases when supply is tight. The degree of market supply tension not only depends on mining output, but also on higher market concentration, which means stronger bargaining power and control over the market in the upstream. The main mines in Australia mainly rely on long-term underwriting, and large-scale mining products have already locked in long-term underwriting agreements. After Bald Hill and Altura are cleared and integrated, only Pilbara and Mt Cattlin are left to sell mines to the outside world. Some new and expanded production capacity have also finalized underwriting agreements. The supply of locked in underwriting rights accounts for more than 85% of overseas lithium mine production. Underwriting rights are mainly concentrated in the hands of several large lithium salt processing enterprises such as Tianqi Lithium Industry and Ganfeng Lithium Industry. For most small and medium-sized lithium salt processing enterprises, there is no guarantee of resources, and they can only purchase a small number of circulating individual orders in the market. When the market supply is tight, it will lead to lithium salt enterprises' grabbing behavior in the spot market, exacerbating the degree of market supply tension and causing prices to roll up in a small way, pushing prices to rise faster.

4.3 Lithium Resource Mergers and Acquisitions Wave, Costs Gradually Rise

In recent years, the shortage of lithium resources and the soaring lithium prices have prompted capital inflows, leading to a continuous emergence of lithium asset mergers and acquisitions. According to the merger and acquisition statistics of Chenshao, among the top ten Chinese overseas mergers and acquisitions in the energy and mineral industry in 2021, four of them targeted lithium mineral resources. This includes Zijin Mining's acquisition of Neo Lithium Corp for approximately CAD 960 million to acquire South American 3Q Salt Lake, Huayou Cobalt's acquisition of Zimbabwe's Prospect Lithium Zimbabwe (Pvt) Ltd for USD 422 million, Ganfeng Lithium's acquisition of Bacanora for no more than £ 190 million, and Tianhua Times' acquisition of AVZ's 24% stake in the Manono project located in the Democratic Republic of Congo for USD 240 million (approximately RMB 1.55 billion).

In recent years, lithium resource mergers and acquisitions have shown an overall trend of decreasing resource endowment and increasing unit price. Not only traditional mining companies are aggressively expanding into the lithium resource sector, but lithium processing enterprises, downstream lithium companies, and even terminal battery factories are also entering the upstream mineral resource development, improving the industrial chain layout, and enhancing resource controllability. The amount of tradable spodumene ore resources in China is scarce, mainly consisting of lithium mica. However, the grade of mica is low, the cost is high, and the transaction price per ton of resources is lower than that of domestic salt lakes; The overseas resource endowment is relatively good, but the development policies and environment are poor, with high uncertainty, and the transaction price per ton of resources is also lower than the domestic level. From the perspective of the same type and similar regions, the price of asset mergers and acquisitions is not based on the current reserves of the transaction. The premium for future resource quantities is significant, and high-quality assets such as 3Q Salt Lake and Dechuangba Lithium Spodumene Mine have significantly higher premiums than the market average. The advantage of low operating costs in the long term brought about by resource endowments is partially offset by merger and acquisition costs.

4.4 The concentration of production capacity has decreased, but giants still control absolute discourse power

The concentration of lithium resource production is high, and giants control the key to lithium supply. SQM, ALB, FMC (Livent), and Lockwood (acquired by Albemarle) are the four traditional lithium giants, with a market share of over 90% at its peak. Lockwood was acquired by Albemarle, Talison is owned by Tianqi Lithium and Albemarle, and Australian companies such as Orocobre and MRL have emerged. The market concentration has decreased, but the concentration of the top seven global production capacities still remains above 70%, giving absolute say in the total global supply and supply pace.

The concentration of future production capacity will decrease, but top enterprises still have absolute say. As more companies enter the lithium resource market, the concentration of the entire industry has decreased, but traditional giants are also expanding, and their scale advantages are constantly increasing. By 2025, the market share of the top seven companies in the industry will still be above 50%. In the future, domestic companies such as Ganfeng Lithium, Zijin Mining, and Ningde Times have a large production capacity plan, but reaching a scale comparable to traditional industry giants needs to be achieved around 2025. Highly concentrated industrial production capacity means that a single enterprise has an amplified impact on the market. When prices decline, enterprises are more likely to control production to affect supply and thus affect price trends, avoiding a rapid or deep price drop that affects enterprise profits.

5、 The profit of the industrial chain is shifting upstream, and the logic of resources being king is finally realized

5.1 Lithium salt processing capacity is heading towards overcapacity, and the situation of insufficient resources is intensifying

The asynchronous expansion cycle of the industrial chain exacerbates the shortage of upstream resources. In the lithium battery industry chain, the expansion cycle from downstream to upstream is becoming slower and more uncertain. The downstream (lithium battery) expansion cycle is 0.5-1.5 years, the midstream (positive electrode, 6F, negative electrode, etc.) expansion cycle is 1-2 years, and the upstream (lithium mine, salt lake) expansion cycle is 3-5 years. The differences in the expansion cycle of different links in the lithium battery industry chain have led to a shortage of production capacity from bottom to top in the industry chain, with downstream production overlapping with inventory demand, exacerbating the shortage of upstream resource supply.

China is the largest producer of lithium salts. As of 2021, China has built a lithium carbonate production capacity of 359000 tons, accounting for 53% of the global total, and a lithium hydroxide production capacity of 218000 tons, accounting for 75% of the global total. From the perspective of enterprises, there are many plans to expand lithium salt production capacity. It is expected that by 2025, China will have 1.18 million tons of lithium carbonate production capacity and 790000 tons of lithium hydroxide production capacity. According to statistics from the Lithium Branch of the China Nonferrous Metals Industry Association, the production of lithium carbonate in China reached 298200 tons in 2021, a year-on-year increase of 59.47%; The production of lithium hydroxide was 190300 tons, a year-on-year increase of 105%. In 2021, China's imports of lithium carbonate increased by 61.69% year-on-year, exports increased by 4.71% year-on-year, imports of lithium hydroxide increased by 583.97% year-on-year, and exports increased by 30.15% year-on-year. Most domestic lithium salt enterprises have low operating rates and resource security is a problem. China has the world's largest lithium salt production capacity and a huge demand for lithium resources. However, the resource guarantee rate of enterprises is generally low, and raw materials are obtained through external procurement of raw materials or cooperation with overseas mining enterprises to obtain underwriting rights. According to SMM statistics, China's dependence on foreign raw materials was about 69% in 2021, and some lithium salt enterprises had relatively low operating rates.

The production capacity of lithium salt processing is growing rapidly, and it may lead to overcapacity in the future. According to statistics, by 2025, the global production capacity of lithium carbonate will reach 1.89 million tons per year, the production capacity of lithium hydroxide will reach 1.15 million tons per year, and the demand for lithium resources will reach 2.9 million tons of LCE. Among them, the lithium extraction products from salt lakes are mostly lithium carbonate, and the salt lake resources and lithium processing capacity are matched, so there is no problem of insufficient raw material supply; Lithium carbonate and lithium hydroxide manufacturers using lithium concentrate as raw materials are facing many resource supply difficulties. In 2021, the global supply of lithium concentrate was 330000 tons of LCE, and the demand for lithium salt plants using lithium concentrate as raw materials was 530000 tons of LCE (excluding salt lake lithium extraction, regeneration, and purification capacity), with an actual capacity utilization rate of only 62%. It is expected that by 2025, the global supply of lithium concentrate will be 1.05 million tons, and the demand for lithium salt plants using lithium concentrate as raw material will be 1.91 million tons of LCE. The actual capacity utilization rate will decrease to about 55%, and the tight situation on the resource lithium salt processing link will become increasingly severe.

5.2 Accelerated transfer of industrial chain profits to upstream

Lithium salt prices have fluctuated in the short term, while lithium concentrate prices continue to rise. Since the second quarter of 2022, the epidemic has affected the production of end car companies, and lithium consumption has been relatively weak. The price of lithium salts has risen too quickly in the early stage, and the downstream's ability to bear it has decreased. There is resistance to the downward transmission of lithium salt prices, and the price of battery grade lithium carbonate has been slightly reduced from 500000 yuan under pressure; However, at the same time, the price of imported spodumene concentrate has accelerated, rising from less than 3000 US dollars per ton to 5000 US dollars per ton. The main cost for lithium salt processing enterprises comes from lithium concentrate, and the cost has gradually increased.

Industry profits are concentrated in the lithium ore lithium salt processing link. In the lithium industry chain, the upstream expansion speed is slower than the downstream, and the supply bottleneck is in the upstream, so prices are transmitted from top to bottom. The downstream precursor and positive electrode links are priced based on the cost plus principle of "raw materials+processing fees". Therefore, the profits of precursor and positive electrode come from relatively stable processing fees, and the prices of raw materials are transmitted to the battery link. The majority of the industry chain profits brought about by the rise in lithium salt prices fall into the two links of lithium ore and lithium salt processing. The profit of the industrial chain is accelerating its transfer to the resource side. In the past, during the explosive demand for lithium, there were certain barriers and capacity gaps in lithium salt processing technology, resulting in considerable profits in the processing process; But looking ahead, the processing capacity and technological replicability of lithium salts are strong. As downstream lithium salt production capacity becomes abundant, production capacity tends towards overcapacity,