Lithium carbonate: Has the price bottomed out in stages?

Lithium carbonate: Has the price bottomed out in stages?

After the short-term lithium price fell to a low level, the market's response to bearish sentiment became more passive, and the long short game became more intense. Before mid August, lithium carbonate is in a low demand season, while supply remains high. The centralized cancellation of warehouse receipts at the end of July will also bring some pressure to the spot market, and it is expected that lithium prices will fluctuate weakly. The future focus will be on the downstream production schedule in August and the progress of the Chilean earthquake. In mid to late August, downstream demand may gradually improve, and the peak season may have a driving effect on the price of lithium carbonate. At that time, there may be a rebound in lithium prices. However, against the backdrop of oversupply, it is expected that the rebound space will also be limited.

Since July, lithium carbonate has continued its volatile bottoming trend, with the main contract hitting a low of around 86450 yuan/ton. The direct reason for the decline is the low-priced release of salt lakes and the increased probability of Trump's election, while the deeper reason is the gradual realization of oversupply. On the supply side, domestic lithium carbonate production remains high, and lithium salt factories have decreased their willingness to reduce production due to an increase in their own mining proportion. On the demand side, it is currently in the off-season for lithium carbonate demand, and the proportion of customer supply from Changhe and Xiehe is relatively high. The positive electrode factory only maintains buying on dips. The centralized cancellation of warehouse receipts at the end of July will bring certain pressure to the spot market. Under the pattern of strong supply and weak demand, lithium carbonate oscillates and reaches its bottom. The core focus of the market has shifted to the downstream production schedule in August and the progress of the Chilean earthquake.

one

Year to date market review: alternating short-term supply-demand mismatch and medium - to long-term surplus

In the first half of this year, lithium carbonate fluctuated widely in the range of [9000012500], and the logic of the market is based on the alternation of short-term supply-demand mismatch and medium - to long-term surplus. The difference from last year's market is that last year's lithium price squeezed the foam from a high position, and the market gradually priced the excess supply. This year, long and short positions are playing around the short-term supply and demand situation after the price has fallen to a relatively low level.

From the beginning of the year to February 20th, against the backdrop of weak demand and continuous decline in lithium concentrate prices, lithium prices fluctuated and fell from 108000 yuan/ton at the beginning of the year to 93000 yuan/ton. January and February are the off-season for lithium carbonate demand, with downstream production at a low level. The strategy of battery factories is mainly to reduce inventory, resulting in very weak demand. Although some small and medium-sized smelters stopped production before the Spring Festival, the overall market is still oversupplied.

From February 21st to May 7th, the market for lithium carbonate first rose and then fell. From February 21st to March 4th, under the combined effect of multiple favorable factors such as the tightening of environmental protection measures in Jiangxi and the significant increase in downstream production in March, as well as further production cuts in Australian mines, lithium prices rebounded rapidly from low levels, reaching a maximum of 125000 yuan/ton. Due to the gradually weakening impact of environmental protection in Jiangxi, the rapid increase in domestic production, and the high increase in import volume, the market experienced a volatile correction.

From May 8th to the end of June, lithium carbonate began a smooth downward trend. The main reason for the decline is that supply and import volumes remain high, while downstream production has begun to weaken month on month. Coupled with the implementation of tariffs imposed by Europe and the United States, and the concentrated cancellation of over 20000 tons of warehouse receipts by the end of July, lithium carbonate has hit a bottom.

two

The actual impact of the Chilean earthquake needs to be traced

According to the United States Geological Survey (USGS), a 7.4 magnitude earthquake struck northern Chile on July 18th local time, with the epicenter located 45 kilometers outside of San Pedro Atacama. Most of the country's large copper and lithium mines are located in this area. The epicenter depth of the earthquake is 130 kilometers, which belongs to a deep source earthquake.

The largest salt lake in Chile, Atacama, is relatively close to the epicenter. According to Baidu Maps' calculations, the distance between SQM and Yabao's salt lake and the epicenter is about 50-60 kilometers, which may affect the production and transportation of the salt lake. Chile is an important supplier of lithium carbonate and a major source of lithium carbonate imports for China. It is expected that Chile's lithium carbonate production will account for about 25% of the global lithium carbonate supply chain by 2024. If the earthquake affects the production or transportation of local salt lake projects, it will have a significant impact on the supply-demand balance of the domestic lithium carbonate market.

According to the latest news, due to the deep epicenter, the impact of the earthquake on the ground is not significant. According to the tsunami warning department of the Chilean Navy's Hydrology and Oceanography Bureau, this earthquake will not trigger a tsunami. The earthquake caused a power outage in the San Pedro de Atacama area, but subsequent power supply has been restored. Researchers from Chile's non-governmental geological research institute stated that although the earthquake was large in scale and had a large amount of falling objects, it was not considered a strong earthquake.

The specific impact of the earthquake on local salt lake production still needs to wait for official statements from SQM and Yabao to assess its actual effects on production, transportation, and other aspects. Short term market sentiment may still be affected by earthquake related news, and follow-up progress needs to be tracked.

three

The accumulation speed is accelerating, and there is a greater pressure to remove inventory

Recently, the accumulation rate of social inventory of lithium carbonate has accelerated. As of July 18th, the total social inventory of lithium carbonate was 119600 tons, including 55200 tons in smelters, 35900 tons in downstream inventory, and 28600 tons in other links. Since late May, the accumulation rate has accelerated, with an average monthly inventory increase of over 3000 tons. Among them, inventory in all links has increased, with the most significant increase in inventory in other links, reaching 19700 tons compared to May 23. The reason for the rapid increase in inventory is oversupply.

At the beginning of the year, the social inventory of lithium carbonate was 69700 tons, and the total social inventory of lithium carbonate increased by 49900 tons, an increase of over 70%. The market is currently hoping to achieve effective destocking during the peak demand season of August to September. Compared to the same period last year, the destocking of lithium carbonate began in early June and ended at the end of October, with a destocking volume of 24100 tons during this period. However, this year, the social inventory of lithium carbonate has reached 119600 tons. Even if the peak season begins to deplete, the absolute level of social inventory may still remain high after destocking, and the high inventory will suppress the rebound space of lithium prices.

four

Bottom line of cost construction price support: Strong cost support around 80000 yuan/ton

There are significant differences in the cost of producing lithium carbonate from different raw materials. The cost of salt lakes is between 30000 to 40000 yuan/ton, located at the far left end of the cost curve, and there is basically no active reduction in production. In 2023, salt lake production will account for 30% -40% of global lithium carbonate supply. The cost range of lithium mines in Australia is relatively large, with cash costs for mainstream mines ranging from $500 to $600, and high cost mines costing nearly $900 per ton. Low cost lithium mines in Australia, such as Greenbush, face less operational pressure, while high cost lithium mines face pressure to be cleared. According to Mysteel's research, most Australian mining companies are locally listed companies, and selling below cash cost will affect the company's future investment and financing plans and valuation. Australian mining companies have stated that if the ore price is below $700/ton, corresponding to a lithium carbonate price of 75000 to 80000 yuan/ton, they will consider stopping production. The cost of spodumene in the Americas ranges from 53000 to 70000 yuan/ton, while the cost of spodumene in Africa ranges from 67000 to 80000 yuan/ton.

The cost of domestic spodumene ore is also relatively low, and the pressure is mainly on the lithium mica end. The cost of mica ore varies greatly, with older mines generally having higher grades and depreciation completed, with costs below 70000 yuan/ton. New mines are mostly mining rights obtained at high prices in the past two years, with low taste and large initial amortization. The comprehensive cost is around 90000 to 100000 yuan/ton, so new mines face significant operational pressure.

Due to the significant differences in production costs on the lithium resource side and the varying interests and demands of the participating parties, it is unlikely that the entire industry will join forces to reduce production. Pay attention to whether there will be tacit production reduction actions within certain small sectors in certain regions. Against the backdrop of oversupply in the next two years, the only option in the future is to force high cost production capacity to exit through price declines in order to complete the repair of the supply-demand balance sheet. According to our calculations, the marginal cost of lithium resources is around 80000 yuan/ton, corresponding to the demand of about 1.2 million tons this year. Therefore, the cost support around 80000 yuan/ton is strong.

five

Future prospects

The next two years will be a big year for upstream lithium mines and salt lakes, and the pattern of excess supply of lithium carbonate is difficult to change. According to our calculations, the global surplus of lithium carbonate supply this year is around 14%, and the surplus will be even greater next year. From a long-term perspective, we are currently in a production increase cycle for lithium carbonate, and the launch and increase of new projects on the supply side will limit the height of the rebound in lithium carbonate prices. In the future, we can only force high cost production capacity to exit by lowering prices in order to complete the repair of the supply-demand balance sheet.

After the short-term lithium price fell to a low level, the market's response to bearish sentiment became more passive, and the long short game became more intense. Before mid August, lithium carbonate is in a low demand season, while supply remains high. The centralized cancellation of warehouse receipts at the end of July will also bring some pressure to the spot market, and it is expected that lithium prices will fluctuate weakly. At the same time, keep an eye on news related to the Chilean earthquake. If the situation develops beyond expectations, it may boost lithium prices. In mid to late August, downstream demand may gradually improve, and the peak season may have a driving effect on the price of lithium carbonate. At that time, there may be a rebound in lithium prices. However, against the backdrop of oversupply, it is expected that the rebound space will also be limited.