Dynamic Analysis of Lithium Market: Comprehensive Analysis of Production Reduction and Price Mechanism

This academic paper delves into the intricate relationship between lithium ore prices and lithium carbonate prices,

 emphasizing the strengthening of the connection brought about by the shift in price mechanisms. 

It focuses on how the decline in ore prices has alleviated most of the price drops, making the losses of these enterprises more controllable. 

The paper positions the main pressure of the current downward trend in lithium prices on upstream lithium ore producers, 

whose strategic responses play a key role in shaping the dynamics of lithium carbonate supply.

The production reduction plan recently announced by Australian lithium miner Core Lithium serves as an important indicator that the adjustment of upstream production has begun. 

This analysis draws insights from the background of historical production cuts by Australian miners from 2019 to 2020, 

comparing the situation around these two periods to infer potential supply disruptions in the current lithium cycle. 

The key issues include the degree of impact of production cuts on prices, the basic mechanisms driving this impact, and the proximity of lithium price turning points.

The interaction between lithium ore prices and lithium carbonate prices has undergone a significant shift, which is caused by changes in the price mechanism. 

This transformation has led to a significant strengthening of their connections, which has had a significant impact on lithium salt factories. 

The decline in ore prices has become a mitigating factor for the price drop, making most of the losses of these enterprises more controllable. 

Therefore, the main pressure brought about by the current decline in lithium prices now falls on upstream lithium ore producers, 

whose strategic response plays a crucial role in shaping the dynamics of lithium carbonate supply.

The production reduction plan recently announced by Australian lithium miner Core Lithium is a significant indicator that the adjustment of upstream production has begun. 

This article aims to analyze the historical background of production cuts by Australian miners between 2019 and 2020, 

and delve into the complexity of the lithium supply interruption in this cycle. 

By comparing the situation around these two production reduction periods, we attempt to infer potential supply disruptions in the current lithium cycle. 

The key issues include the degree of impact of production cuts on prices, the basic mechanisms driving this impact, and the proximity of lithium price turning points.

Through a comprehensive review of these aspects, 

we strive to provide a detailed understanding of the internal dynamic evolution of the lithium market and its impact on stakeholders at all stages of the value chain.

1. Historical background and market dynamics

From 2015 to early 2018, the price of lithium carbonate experienced a bullish trend, rising from 50000 RMB/ton to 168000 RMB/ton. 

The rise in lithium prices prompted Australian lithium miners to reach their peak between 2017 and 2018, 

with projects such as Mt Cattlin, Pilbara, and Mt Marion being put into operation successively. 

The lithium concentrate production capacity in Australia increased from 1 million tons at the beginning of 2017 to approximately 2.1 million tons in 2019, an increase of over 100%.

However, since the beginning of 2018, due to loose supply, the price of lithium carbonate has started to decline unilaterally. 

By the end of 2018, the price of lithium carbonate had plummeted to 79540 RMB/ton, a decrease of 51.5%. 

The price of lithium ore has also decreased, dropping from $980/ton at the beginning of the year to $730/ton, a decrease of 25.5%. 

Affected by the continuous decline in lithium prices, lithium mines in Australia have entered a phase of production cuts and shutdowns until the end of 2018.

In the fourth quarter of 2018, MRL, the original shareholder of Wodgina Lithium Mine, suspended DSO sales. 

Subsequently, Albemarle announced the acquisition of 60% equity in the Wodgina project. 

In the second half of 2019, Pilbara began implementing an active production and inventory reduction strategy, reducing capacity utilization to approximately 30%, 

which continued until the second quarter of 2020. 

In 2020, the original shareholders of Mt Cattlin lithium mine announced production cuts and prioritized the use of ore inventory for operations. 

The Mt Cattlin project produced 109000 tons of lithium concentrate in 2020, a decrease of 43% compared to 2019. 

In October 2020, Altura announced bankruptcy management due to the expiration of the high interest loans issued in 2017 and the company's inability to repay them. 

The project had already built an annual production capacity of 220000 tons of lithium concentrate before its closure.

Affected by production cuts, Australia's lithium mine production began to decline quarterly from the third quarter of 2019 and reached 340000 tons by the second quarter of 2020, 

a decrease of 30% compared to the second quarter of 2019. Compared to earlier periods, the growth rate of global lithium carbonate production has also slowed down. 

Projects undergoing production cuts can be roughly divided into two categories: 

financially sound companies unwilling to sell lithium ore at low prices and actively begin strategic production cuts; 

Financial struggling companies under survival pressure are forced to reduce production.

In terms of the impact of production cuts, although the first project announced production cuts at the end of 2018, lithium carbonate and lithium ore prices continued to decline.

 In 2019, the price of lithium carbonate fell by 36.8%, and the price of lithium concentrate fell by 33.6%.

 From January 2020 to November 2020, the price of lithium carbonate decreased by 12.5%, and the price of lithium concentrate decreased by 16.5%. 

Starting from December 2020, due to the surge in downstream demand and production cuts,

 lithium ore prices hit bottom and rebounded, marking the beginning of the famous lithium "super cycle" from 2021 to 2022.

Based on the progress of these production cuts and the performance of lithium prices at the same time, several conclusions can be drawn: 

1) Due to the varying operating conditions of lithium mining companies, production cuts are often not carried out synchronously, and each mining company chooses according to their own situation.

 Correspondingly, the scale of production reduction is a gradually expanding process, and the impact on production will only be significant when major projects begin to reduce production;

 2) The beginning of production reduction is not a sufficient condition for the rebound or turning point of lithium carbonate prices. 

After the first project announced production cuts, lithium prices continued to decline for 24 months without an immediate halt;

 3) Production cuts have a certain impact on lithium prices, but this impact is significantly different from the fluctuating effects driven by demand cycles. 

Due to the rebound caused by production cuts, lithium mining companies may resume production once prices rebound to a certain extent.

2、Recent developments and emerging trends

2.1 Finnis project temporarily suspended due to poor profitability

Australian lithium miner Core Lithium announced on January 5th that due to deteriorating lithium market conditions, 

the company will temporarily suspend mining operations at the Grants Open Mine in the Finnis project, but will continue to process existing ore reserves. 

Meanwhile, considering the mining and construction difficulties during the rainy season and the focus on reducing expenses, 

early engineering work for the BP33 project in the Northern Territory has been suspended.

Core Lithium is an emerging Australian lithium mining company with relatively small reserves. Its core asset is the Finnis lithium project located in the Northern Territory of Australia. 

The ore reserves of this project are 10.6 million tons, with a grade of 1.30% Li2O, equivalent to 142000 tons of Li2O resources. 

The high cost of the Finnis project may be the main reason for the company's production cuts. 

The spodumene production of the Finnis lithium mine project in the first, second, 

and third quarters of 2023 was 3.6, 14.7, and 20.7 thousand tons (including SC5.35% and SC5.0%), respectively, equivalent to 0.04, 0.17, and 0.22 thousand tons of LCE. 

The company's expected production for the 2024 fiscal year is 80000 to 90000 tons of spodumene,

 equivalent to approximately 10000 tons of lithium carbonate, which will have minimal impact on global lithium carbonate supply. 

At the same time, Core Lithium has stated that it will continue to process its current ore reserves, which are sufficient to support the operation of its processing plants until mid-2024, 

so its short-term shutdown will not directly affect Australia's mining supply.

2.2 Greenbushes production reduction

The Greenbushes mine located in Western Australia is one of the largest and highest grade lithium deposits in the world, 

providing lithium concentrate for the global battery market. 

However, the operator of the mine, IGO Limited, 

recently announced that it will adjust its production forecast for this fiscal year from the initial 1.4 million to 1.5 million tons to 1.3 million to 1.4 million tons. 

This decision is in line with the company's inventory management strategy and reflects the challenges of the lithium market. The production reduction is 100000 tons of spodumene. 

If the price of lithium ore continues to decline, there is a possibility of further reduction in production. 

After reducing lithium mine production, IGO also announced the closure of a nickel mine project in Western Australia, indicating a pessimistic outlook for 2024.

3、What are the differences in the background of this round of production reduction?

3.1 Changes in the Global Lithium Resource Supply Pattern:

Between 2019 and 2023, the global lithium production pattern underwent significant changes, 

with production increasing from 77000 tons to 120000 tons in 2021, 140000 tons in 2022, and 160000 tons in 2023. 

Although Australia, Chile, and China have maintained their leading positions, contributing 37.5%, 18.8%, and 11.3% of global supply respectively in 2023, 

their production shares have undergone significant changes during this period. 

Australia's share has significantly decreased from 54.5% in 2019 to 37.5% in 2023,

 indicating a significant decline in its dominant position as a major lithium producing country.

 At the same time, the intensified development of South American salt lake projects has led to the emergence of new projects, 

while the supply of Chinese salt lake projects and lithium mica ore has also increased due to investment from Chinese companies in African projects. 

These changes have altered the cost curve of lithium resources, as production costs continue to rise due to the decrease in grade and the increase in sales prices of spodumene. 

However, compared to previous cycles, the financial situation of lithium mining companies has significantly improved, thanks to the observed lithium carbonate price super cycle in 2021-2022.

3.2 Evolution of Production Reduction:

It is expected that the current round of production cuts will be different from previous cycles. 

The leading participants in major global projects generally have strong financial strength, and the possibility of passive production cuts will be greatly reduced. 

Most Australian mining companies have experienced past lithium price cycles and are expected to adopt more flexible sales strategies. 

However, under cost pressure, it is expected that the supply of spodumene in Australia will decrease to some extent. 

However, it is unlikely that a "bankruptcy event" will occur in the short term, and achieving substantial clearance of supply side production capacity may require further waiting. 

The progress of the new South American salt lake project may be affected by factors such as project approval.

 In addition, political changes in Chile and bureaucratic challenges in Argentina may affect lithium supply, while African projects face delays in environmental and logistics challenges.

3.3 Future outlook:

Looking ahead, the evolution of production cuts will depend on various factors. 

The leading participants in major global projects have strong financial strength, and the possibility of passive production cuts is expected to decrease. 

Australian mining companies with a comprehensive understanding of lithium price cycles may adopt more flexible sales strategies. 

However, challenges still exist, particularly the progress of projects in South America and the impact of political changes in Chile and bureaucratic obstacles in Argentina. 

African projects also face obstacles such as strengthened policies and high transportation costs, while domestic lithium mica mines are facing environmental pressures. 

Overall, although supply disruptions may periodically affect lithium carbonate prices, the real turning point may not be imminent, 

and substantial capacity clean-up or unexpected demand growth is needed to trigger significant market changes. 

Each cycle has its own characteristics, and the next step is to focus on the operational strategies of mining companies.

4 Conclusion

According to our calculations, there is a certain surplus of lithium carbonate supply this year (12-16%). 

In this situation, only a decrease in price can complete the clearance of production capacity.

 In terms of demand, the new energy vehicle industry has entered a period of speed transition. 

On the current high basis, the demand growth rate will gradually stabilize and will not experience explosive growth like in 2021-2022. 

Upstream lithium mining companies are trapped in a prisoner's dilemma, and the process of clearing production capacity may take a long time. 

The diversification of lithium resource suppliers has also increased the difficulty of reaching consensus among lithium mining companies, 

and the real turning point for lithium carbonate prices may not have arrived yet. 

Supply disruptions will periodically affect lithium carbonate futures prices, but in the case of oversupply, the rebound may be limited. 

The process of achieving automatic cleaning through price reduction is slow, and supply disruptions caused by geopolitical factors are more significant. 

Only when the substantial clearance of supply side production capacity reaches a certain scale or the demand for lithium carbonate greatly exceeds expectations, 

can the price of lithium carbonate truly turn around and enter a new cycle. 

Each cycle has its own characteristics, and then it is necessary to pay attention to the operational strategies of mining companies.