China's role in the global lithium market and the current situation of overcapacity in the lithium battery industry

China's role in the global lithium market and the current situation of overcapacity in the lithium battery industry

China's lithium battery industry faces a serious problem of overcapacity in 2023, with production capacity far exceeding domestic and global demand, leading to a significant decline in prices and causing many companies in the industry to experience losses.Goldman Sachs predicts that the lithium battery industry will bottom out and rebound in 2024, and the capacity utilization rate will gradually increase from 2024 to 2026.Faced with the continuous decline in lithium prices, major lithium production companies have responded to market pressure through hedging, production suspension and cost management strategies.The supply of lithium from low-cost salt lakes in South America will be released on a large scale in the next few years, forcing high-cost producers to face greater competitive pressure.In the future, vertical integration and inventory management will become the key to improving the profitability of enterprises.

1. Introduction

With the acceleration of global energy transformation, the lithium industry, as an important raw material for electric vehicles (EV) and renewable energy storage, is playing a key role.However, in recent years, the lithium battery industry, as one of the core links of this transformation, is facing serious overcapacity problems.This article will explore the challenges faced by China's lithium industry, focusing on analyzing overcapacity, price pressure, and the response measures of major lithium producers.

2. Overcapacity in China's lithium battery industry

In 2023, China's lithium battery production capacity is 3.3 times the domestic demand and 1.5 times the global demand.However, the industry's capacity utilization rate is only 61%, far below the reasonable level.This overcapacity has led to a 45% year-on-year decline in lithium battery prices in the first quarter of 2023.Due to the decline in prices, a quarter of the companies in the industry have incurred losses.

Goldman Sachs predicts that 2024 will be the bottom of the current industry downturn cycle, and then the capacity utilization rate will rise to 55%-60% between 2024 and 2026.Although the current excess situation is severe, some companies have begun to take the initiative to reduce overcapacity, indicating that the lithium battery industry may see a bottoming out and rebound in 2024.

As lithium prices continue to fall, companies closely related to lithium salt production have fallen into losses.The three major lithium industry giants in China - Tianqi Lithium, Ganfeng Lithium and Shengxin Lithium Energy - all suffered significant losses in 2023.Take Tianqi Lithium as an example. The company is expected to lose 4.88 billion to 5.53 billion yuan, while it made a profit of 6.452 billion yuan in the same period last year.

The decline in lithium prices not only reflects the current situation of oversupply, but also reflects the trend of slowing global demand.In addition, the excess production of electric vehicles has also exacerbated this problem.In 2023, the production capacity of China's new energy vehicles was 2.1 times the domestic demand and 1.2 times the global demand, with a capacity utilization rate of only 54%.

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3. Industry measures to deal with the decline of lithium market

3.1. Hedging and Cost Management Strategies

Faced with the continuous decline in lithium prices, many lithium companies are actively seeking solutions.Hedging is one of the common coping strategies.Tianqi Lithium has established a futures management team to hedge against price fluctuations through the futures market, ensuring the stability and continuity of operations.Specifically, companies can lock in future sales prices or purchase costs by buying or selling futures contracts in the opposite direction of the spot market in the futures market.

Inter-temporal arbitrage is also a coping strategy.When there is an unreasonable price difference between futures contracts of different delivery months, companies can use this price difference window to arbitrage, thereby avoiding risks and gaining benefits to a certain extent.

3.2. Production halt and reduction, as well as cost control

Many enterprises also choose to reduce production capacity through active production suspension, overhaul and other methods.The world's largest lithium miner, American Albemarle, has suspended the construction of a lithium processing line at its Kemerton plant in Australia and is conducting maintenance on another line. It is expected to lay off 300 employees.Domestic enterprise Zhicun Lithium also announced that its two wholly-owned subsidiaries will carry out production stoppage and maintenance in phases from July 2023.

At the same time, some companies are exploring more cost-effective ways of resource extraction.Ganfeng Lithium has gradually shifted its focus to extracting lithium from brine, which is more cost-effective than extracting lithium from spodumene, with a cost of approximately 30,000 to 50,000 yuan per ton, compared to 40,000 to 80,000 yuan per ton for extracting lithium from spodumene.This shift has helped the company remain competitive amidst low prices.

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4. Future outlook of lithium industry

Despite the current severe decline in lithium prices, low-cost producers, especially those relying on South American salt lakes to extract lithium, still have a competitive advantage.As lithium prices continue to decline, high-cost producers will face greater pressure, forcing them to either reduce costs or exit the market.

Industry experts predict that from 2024 to 2026, lithium supply will be released on a large scale, especially from low-cost South American salt lakes.This will intensify market competition, lead to the clearing of high-cost resources, and further form a more stable price environment.

To navigate through this challenging period, lithium producers need to focus on cost control, hedging strategies, and inventory management.Through vertical integration, connecting the upstream and downstream industrial chains and reducing raw material costs will also help improve overall profitability and enhance the competitiveness of enterprises in the global market.

conclusion

China's lithium industry is currently facing the dual challenges of overcapacity and falling prices.Although industry giants are responding to the current difficulties through cost management, hedging and active production shutdown, the real recovery of the market still needs time.CLPC predicts that the lithium battery industry will bottom out in 2024, and the future recovery will depend on how companies effectively respond to the current market environment and adjust their industrial structure.