Why the Lithium Destocking Doesn't Change the Shortage Thesis

• Lithium prices have pulled back recently but the long-term shortage thesis remains intact.
• EV sales continue to grow rapidly, driven by BYD and Tesla. Energy storage demand is also surging.
• 2022 lithium supply deficit was larger than forecast, triggering new supply sources. But 2023 supply growth will be more moderate.
• Most new spodumene supply is being controlled by incumbent producers rather than reaching the market. This will constrain supply growth.
• At current prices, lithium conversion economics don't work for non-integrated players if they have to use spodumene. Prices likely need to rise further.

Lithium prices have pulled back sharply from their peak in 2022, with spodumene concentrate prices declining from over $7000/tonne to around $4000/tonne currently. This destocking was inevitable following the massive price surge last year. However, the long-term shortage thesis remains very much intact. Demand continues to grow rapidly while supply growth lags. Once excess inventories are worked through, tight market conditions are set to return.

Surging EV Demand Continues Unabated

Electric vehicle sales globally are on track to reach 14 million units in 2023. This represents growth of over 50% from 2022 levels. Leading the charge are Tesla and China's BYD, who combined now account for close to 40% of global EV sales. Legacy automakers like Volkswagen, BMW and Ford remain far behind in EV sales despite their efforts to electrify model lineups.

Tesla and BYD are growing EV sales rapidly while maintaining strong profitability, aided by high-tech advantages like self-driving software for Tesla. In contrast, most legacy automakers are losing money on EVs currently. As EVs scale to the mid-price segment globally, it will be challenging for legacy automakers to produce affordable EVs profitably without the software and battery cost advantages of leaders like Tesla. This is likely to drive more joint ventures and long-term supply agreements between automakers and battery metals producers.

Alongside surging EV demand, energy storage installations are forecast to double globally in 2023. Lithium iron phosphate batteries dominate the stationary storage market. Major battery producers like CATL are developing larger format lithium iron phosphate cells optimized for storage applications. This means lithium demand from the storage market may exceed EV demand within the next few years. Unlike EVs, energy storage demand is less dependent on subsidies and more driven by intrinsic economics as solar and wind power scale up.

The Supply Gap Remains

The lithium market deficit in 2022 was larger than initial forecasts, at around 130,000 - 150,000 LCE tonnes versus initial estimates of a 90,000-tonne shortage. This triggered frantic activity to bring on new supply sources, with spodumene prices briefly reaching $9000/tonne. However, the ramp-up of new production in 2023 is now looking more subdued.

Africa presents an upside risk for new supply, however, there are limitations around resource quality and ESG considerations for new projects. Ongoing permitting delays have pushed out timelines for several key new projects in Australia and North America. The volatile equity markets have also slowed funding for early-stage companies. This makes it unlikely there will be sufficient new supply in the short term to meet surging demand growth.

There are increasing signs that incumbent lithium producers are looking to control and integrate more of the lithium value chain. Rather than selling spodumene to third-party converters, prominent examples include. This vertical integration limits the supply available to other players. New spodumene resources are also increasingly being acquired by the major incumbents. These moves by incumbent producers to control more supply will constrain availability and increase costs for newer entrants. It also helps maintain a tight market balance by moderating supply ramp-ups in response to pricing signals. This is positive for the long-term lithium pricing outlook.

Conversion Economics Don't Work at Current Prices

Currently, Chinese spot lithium carbonate prices are around RMB 275,000/tonne, after recovering from lows of around RMB 170,000/tonne in early 2023. However, if non-integrated converters need to use spodumene concentrate as feedstock at current spot prices of around $4000/tonne, the economics don’t make sense.

Based on spodumene grades declining industrywide to around 5% Li2O, it requires about 7.5 tonnes of concentrate to make 1 tonne of lithium carbonate. After including processing costs and taxes, the total cost of production is around RMB 300,000/tonne at best. With spodumene prices likely to rise to incentivize more supply, lithium carbonate prices will need to exceed RMB 300,000/tonne for conversion to be economic.

Higher prices may come as early as Q3 2023 as demand recovers and inventories clear. This will drive the need for more spodumene supply, tightening the concentrate market again.

Key Takeaways

While the recent destocking was inevitable, it does not change the fact that lithium demand is surging while new supply sources remain constrained. Major producers are acting to control supply rather than flooding the market. With the long-term transition to EVs still in its early innings, tight market conditions will likely return once excess inventories are absorbed. Lithium prices need to rise further to incentivize new capacity and clear the persistent deficits ahead. Investors should view the current weakness as a buying opportunity.

• Surging EV sales and energy storage demand drive lithium shortage through the 2030s
• Supply failing to keep pace despite price signals - new projects delayed, incumbents integrating more
• Lithium pricing needs to rise materially to incentivize adequate investment in new capacity
• Current destocking a buying opportunity - tight market conditions to return as inventories normalize
• Deep industry expertise positions BMI to provide leading insights and data to capitalize on EV growth
• First mover advantage in lithium, cobalt, and nickel - over a decade of proprietary data
• Partnerships with automakers, and battery/mining companies provide unmatched access
• Recent funding round validates growth potential of BMI's subscription data model

Lithium Companies to Watch

Li-FT Power

Li-FT Power (CSE: LIFT) 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.

Frontier Lithium

Frontier Lithium (TSX-V: FL) is a preproduction company focused on becoming a major domestic supplier of lithium in North America for the electric vehicle and energy storage markets. Its flagship PAK lithium project in Ontario contains the highest grade lithium resource in North America and is the second largest by size at over 27,000 hectares. The project has delineated two premium spodumene-bearing lithium deposits, PAK and Spark, as well as two other discoveries, Bolt and Pennock. A 2023 pre-feasibility study forecasts a 24-year project life with a post-tax NPV of $1.74 billion and 24.1% IRR based on producing spodumene concentrates and downstream lithium hydroxide. The project has significant potential for further exploration and resource expansion.

Brunswick Exploration

Based in Montreal, Canada, Brunswick Exploration (TSX.V: BRW) is an early-stage exploration company searching for metals like lithium needed for decarbonization. Using cutting-edge exploration technologies and proven prospecting techniques, Brunswick aims to leverage its team of experienced geologists to identify and discover unknown lithium deposits across Canada. The company believes combining innovative modern technologies with time-tested geology methods will lead to new mineral discoveries.

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.