Why Lithium Faces Short-Term Headwinds!

• Lithium producers reported solid Q3/23 production volumes but lower pricing, indicating potential oversupply.
• Automakers like GM and Ford tempering EV production targets, raising demand concerns.
• But experts still see robust long-term lithium demand growth from electrification.
• Australia gaining lithium market share given resources, and miners' expansion plans.
• Watch for supply discipline from majors like Albemarle and SQM amid pricing pressure.

The lithium market is experiencing some turbulence amidst concerns over a potential oversupply situation. Key lithium producers reported solid production volumes in Q3 2022 but realized lower pricing, indicating an excess supply environment currently. This has fueled fears that the lithium market could face an oversupply crunch, especially with major automakers like GM and Ford tempering their EV production targets. However, the long-term outlook for lithium demand remains robust based on continued electrification and energy storage growth trends. While near-term pricing pressures persist, the secular tailwinds supporting lithium remain intact.

Q3 Lithium Production Solid But Pricing Drifting Lower

Major lithium producers like Mineral Resources and Pilbara Minerals reported strong production volumes in Q3/23, but realized weaker pricing compared to the first half of 2022. For example, Mineral Resources saw lithium spodumene concentrate pricing drift down to around $3,000 per tonne on an SC6 equivalent basis during the quarter. This indicates increasing competition and potentially excess supply conditions currently in the lithium spodumene market.

Pilbara Minerals also noted they were the first to feel the pricing pain given their lack of long-term contracts, with pricing down to around $1,800 per tonne on average. This shows that spot pricing has deteriorated materially from the euphoria and tightness seen earlier in the year. However, lithium demand and supply remain in a slight deficit in 2023 if the impact of inventory destocking is fully accounted for. The key question is whether major producers will show supply discipline or "blink first" and accept lower prices just to move volume.

Oversupply Fears Driven by Lower Automaker Demand

Much of the concern around oversupply stems from reduced EV production targets from major automakers. Both GM and Ford announced plans to slow down and pare back some of their ambitious EV investment spending, with Ford notably postponing construction plans for two battery plants. This reflects the significant challenges these automakers face trying to profitably manufacture affordable electric vehicles amidst high inflation and rising interest rates.

The recent United Auto Workers strike and Tesla's price cuts have also pressured Detroit automakers, directly impacting their ability to invest heavily in new EV models. However, the overall US EV market is still set to grow strongly over the next few years. Continued expansion from players like Hyundai-Kia, Rivian, and Lucid as well as new EV models in the pipeline from Tesla should continue to drive growth. Moreover, the electric semi-truck market and energy storage system demand provide lithium-intensive avenues beyond just automotive applications.

So while the EV transition may claim some casualties among legacy automakers over time, Klein believes overall lithium demand remains sound given broader energy transition tailwinds. The demand outlook likely remains higher than some bears arguing for a lithium demand cliff due to recession fears.

Australia Emerging as a Key Global Lithium Player

Another key theme shaping the lithium market is Australia's rising prominence as a major global lithium producer. Chile's SQM is offering to pay a huge premium to acquire Australia's Azure Minerals over acquiring a lithium brine project located in its own backyard in Chile. This indicates Australia's advantages in lithium resource development and friendliness for miners currently.

Major Australian mining names like Gina Rinehart and Chris Ellison are also aggressively expanding their lithium operations domestically. This entrepreneurial activity and availability of ample lithium resources positions Australia to significantly grow its global lithium market share in the years ahead. While Chile remains the world's largest lithium producer for now, its market share appears set to decline as Australia and other countries emerge as lithium mining powerhouses.

Supply Discipline Among Incumbents Will Be Critical

In summary, near-term lithium prices will remain under pressure but there is unlikely to be a collapse in long-term demand. The key will be monitoring whether major incumbent producers like Albemarle and SQM show supply discipline or feel forced to accept lower prices to maintain market share. Developing more lithium conversion capacity outside of China will also help balance the industry by reducing dependence on Chinese demand signals.

So while the exuberance and euphoria seen in lithium markets earlier in the year now appears overdone, the broader electrification megatrend supporting lithium demand growth remains intact. Lithium is expected to face some short-term choppiness as supply-demand balances get recalibrated lower. But the long-term trajectory still points upward given the huge growth runway ahead for EVs, grid storage, and other lithium-dependent technologies.

Key Takeaways for Lithium Investors

For investors, several key takeaways emerge from the latest lithium market developments:

• Near-term pricing weakness ahead - Lithium pricing will likely remain weak over the next few quarters due to excess supply, but no major cliff in end demand appears on the horizon. This near-term softness needs to be priced in.
• Leading producers continue investing - Major lithium producers like Albemarle and Pilbara Minerals still making significant long-term production investments, underscoring their own positive demand outlooks.
• Focus on low-cost incumbent producers - With pricing under pressure, preference should lie with durable low-cost producers able to weather near-term volatility. Cost leaders like SQM and MinRes well-positioned.
• Junior miners require patience - Early-stage exploration plays retain upside but require patience amidst potential market turbulence. These higher-risk bets may face volatility if recession worries escalate.
• Secular growth story intact - Despite noise, the electrification and decarbonization tailwinds driving lithium demand remain strong. The long-term secular growth trend appears robust barring an improbable global economic collapse.

While lithium demand faces some valid questions in the near term, the long-term outlook remains positive. Investors should selectively target low-cost incumbent producers, explore value opportunities during periods of weakness, and retain conviction in the demand trend supporting lithium. Near-term pricing fluctuations are likely, but the thematic tailwinds around vehicle electrification, grid storage, and sustainable energy usage will continue driving lithium demand higher over the long run.

Lithium Companies to Watch

Frontier Lithium

Frontier Lithium Inc. is a mining company focused on the exploration and development of lithium deposits in Northern Ontario, Canada. The company's flagship asset is the PAK Lithium Project, located in a premium lithium district. The PAK Project represents the largest land package in the region at close to 27,000 hectares, with significant potential for further exploration.

The project contains North America's highest-grade lithium resource, with two premium spodumene-bearing deposits - PAK and Spark - located 2.3 km apart. A 2023 pre-feasibility study outlined a 24-year project life, at a post-tax NPV(8%) of US$1.74 billion and an Internal Rate of Return (IRR) of 24.1%. Frontier Lithium aims to become a major supplier of spodumene concentrates and battery-grade lithium hydroxide to support the growing electric vehicle market in North America. The company is advancing PAK toward production as the first fully integrated lithium mining and processing operation in Ontario.

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, with the goal of playing a major role in the transition to sustainable energy. The company's core assets are the advanced-stage TLC lithium project in Nevada and Falchani lithium 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

Li-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 Cali Project in 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.