Lithium: Short Term Pain, Long Term Gain?

Feature Stories | Oct 13 2023

Most brokers assume lithium prices have further to fall before a supply deficit looms later this decade. Have lithium mining stocks been sufficiently de-rated?

-Lithium prices falling on weaker Chinese EV demand
-Lithium miner share prices have fallen in concert
-Longer term the future for batteries is bright
-Are mining stocks offering value?

By Greg Peel

Today’s electric vehicles fall into three categories: battery elective vehicle (BEV), plug-in hybrid electric vehicle (PHEV), and hybrid electric vehicle (HEV).

A BEV is a pure battery-driven EV with an electric motor and that’s it. Teslas are the obvious example. BEVs need to be plugged into a power source for charging.

PHEVs are also plugged into a power source for recharging, but also have an internal combustion engine that takes over when the charge runs out, overcoming range anxiety when charging facilities are scarce.

HEVs are not plugged into a power source, but rather are charged by the car braking (look up "regenerative braking"). They also have an internal combustion engine and the obvious example is the Toyota Prius.

In terms of battery size (and thus weight), HEVs are the lowest (some 5Kwh on average), PHEVs next (20Kwh) and BEVs the biggest (60Kwh).

While the fastest growing market for EVs has been China in recent years, and the country leads the world by volume of sales, the Scandies are still way ahead in terms of EVs per capita and charging station capacity. Recently Chinese dealers are finding a shift out of BEVs and into PHEVs and HEVs as Chinese charging infrastructure has not kept up, Morgan Stanley found on a recent visit, despite the government continuing to spend heavily on grid and charging-related infrastructure.

Underlying weaker demand for any EVs is China’s macro environment, in which reluctant Chinese consumers have not exited covid lockdowns to spend with their ears pinned back as Beijing was hoping. Chinese discretionary consumption has disappointed through 2023.

Tesla suffered a -10.9% year on year reduction in sales in China in September, after sales fell -12% in the month from August. One issue facing Tesla is increased competition in the country from Chinese domestic vehicle manufacturers. Local leader BYD saw a 42.8% jump in sales in September of its EV and hybrid models.

But BYD is coming off a much lower base and Tesla still dominates, particularly in the US where it has more than 50% of market share, with the balance spread across US, European, Japanese and Chinese manufacturers each with only a small share.

Weak Chinese EV demand is the primary demand-side driver of 2023’s significant fall in lithium prices. The Chinese lithium carbonate price is down -70% and spodumene down -62% year to date, albeit from giddy heights in 2022.

Note there is no one “lithium price”, nor any global price unlike, say, Brent crude oil.

It’s a Process

The lithium/EV value chain is more complex than any other commodity under UBS’ coverage. The problem is there are many steps in the processing chain, from the mining of raw spodumene through various chemical conversions until a final product is available for lithium-ion batteries.

Each of these products has a price.

Product pricing is mostly China-dominated, notes UBS, and can be opaque. The fact the industry is still in its infancy adds further complexity. Producers at each step hold inventories, the extent or lack of which will inform pricing along the chain.

UBS expects end-demand for lithium-ion batteries to grow at a 25% compound annual growth rate through 2030. But assumptions and working capital and inventories along the chain are difficult to accurately gauge, and UBS is still trying to collect data.