Oversupplied Lithium Market Toughing it Out until 2024 Out; Equities & Price to Remain Under Pressure

• Lithium prices increased over 1000% from 2020 to 2022 highs in November, but have since fallen sharply due to oversupply concerns and de-stocking.
• Lithium demand is still expected to be strong in 2023 with around 14 million EVs forecasted, but lithium chemical producers cut utilization rates by around 40% in Q1 2023.
• Energy storage demand is underestimated and expected to soak up small amount of lithium supply, especially using LFP batteries.
• The lithium industry expects prices to rebound in 2024 as de-stocking runs its course and EV production ramps up again.
• Stable long-term lithium price range is $25-$28,000, enough to incentivize supply while keeping OEMs profitable.

Lithium Pricing to Normalize on Strong EV Demand

Lithium prices are coming off their huge spike in 2022, but industry experts believe the current oversupply situation will be short-lived with electric vehicle (EV) demand still forecasted to grow rapidly. Lithium remains a compelling investment case despite recent price weakness.

Lithium carbonate prices in China increased over 1,000% from their 2020 lows to hit record highs in November 2022, driven by strong EV demand and chronically undersupplied conditions. However, prices have fallen sharply since then, with lithium carbonate prices now down around 70% from their peak.

This rapid price decline occurred as the massive margins available in lithium last year took lithium units out of the market. Lower-quality supplies from irregular sources flooded the market, including direct shipping ore (DSO) material from Australia and Africa and reprocessed tailings and lepidolite in China. At the same time, consumers started to de-stock inventories that were built when prices were rising week-to-week.

Lithium Price Bottom Not in Yet; Set to Grow Accretively in 2024

The Chinese converter industry got their hands on more lithium units. The influx of new supply, when combined with de-stocking by consumers, created a situation of oversupply and pushed lithium prices down much further than expected.

However, lithium demand remains robust, underpinned by EV sales which are still forecasted to reach 14 million units globally in 2023. While EV sales slowed in January and February due to the Chinese New Year, year-over-year growth resumed again in March and is expected to grow 30% y-o-y. We’ve had good year-on-year and month-on-month gains in February and again in March.

This inventory at dealerships is expected to dampen near-term demand, but will ultimately get cleared, likely in Q4 which seasonally tends to be the strongest quarter for EV sales. Supporting the longer-term demand outlook for lithium, consumer waiting lists for EVs in Europe can stretch from 6 months to 2 years.

Energy Storage to Soak Up Some Supply

In addition to strong EV demand, the under-appreciated and growing energy storage market is expected to absorb some lithium supply. LFP (lithium iron phosphate) chemistries in particular are expected to dominate the energy storage segment.

For energy storage, especially in China, EV producers will focus more on LFP. Energy storage will soak up some excess lithium supply when it arises. This could partially prevent oversupply situations from persisting long-term given how chronically undersupplied the lithium industry has been over the past decade.

The Investment Thesis for Lithium

• Current oversupply and de-stocking trends will be temporary; structurally tight supply/demand conditions will reemerge with EV penetration still in the early phases.
• Valuations have come down substantially from frothy 2021 levels; now trading below 1x book value in some cases.
• Leading producers with low costs and near-term growth will outperform if deficits return. Focus on vertically integrated, self-sufficiency downstream via lithium hydroxide conversion.
• Capitalize on currently depressed prices to accumulate positions in high-quality lithium developers with clear paths to production over the next 2 years.

The outlook remains highly favorable for lithium pricing over the medium and longer term due to the massive growth still ahead for lithium-ion batteries in EVs and grid storage. The current pullback is likely presenting the last major buying opportunity at deflated valuations. Exposure to pure-play lithium producers and near-term developers with strong economics provides a compelling opportunity for investors with a 2-3-year time horizon.

• Lithium prices have corrected sharply from their November 2022 highs, but de-stocking is starting to run its course and prices will slowly recover.
• EV demand stays robust despite some slowdown from parts shortages and high inflation, supporting a gradual rebound in lithium pricing as de-stocking clears.
• Lithium carbonate price be erratic in 2023 due to the nascent industry's 'growing pains'.
• However, expect a short-lived spike as the industry reacts and learns realities!
• Price to remain around US$12-18/kg by the end of 2023. We expect more material gains H1/2024
• For long-term and patient holders, shares of top lithium miners offer value after substantial pullbacks, still leveraged to an attractive long-term pricing outlook.

Companies to Watch

American Lithium

American Lithium is developing large-scale lithium projects in Nevada and Peru as well as one of the world's biggest uranium projects, to play a major role in the transition to sustainable energy. The company score assets are the advanced-stage TLC lithium project in Nevada and the Falchanilithium project in Peru, which have robust preliminary economic assessments. American Lithium also owns the Macusani uranium project in Peru, which has seen significant historical development. With assets at various stages of pre-feasibility and feasibility studies, American Lithium is positioned to be a major player in lithium and uranium mining.

Li-FT Power

company'sLi-FT is a mineral exploration company focused on acquiring and developing lithium pegmatite projects in Canada. Their flagship Yellowknife Lithium Project in Northwest Territories contains 13 lithium pegmatite dykes near infrastructure and they have initiated a 45,000-meter drill program in 2023 to define resources. Li-FT also has the early-stage Project in the Northwest Territories within a historic lithium pegmatite belt and drilling is planned once permits are received. In Quebec, Li-FT has three large exploration properties near the Whabouchi deposit where 10 targets have been generated and initial drilling of two targets will occur in summer 2023 with more exploration planned for 2024. Overall, Li-FT is advancing a portfolio of Canadian lithium assets through systematic exploration and drilling.