Lithium in Limbo: China’s Oversupply, Geopolitical Volatility, Macro Uncertainty
The energy transition is set to boost demand for key transition metals like lithium - so why are prices at a multi-year low?
The lithium market is under significant strain due to a confluence of macroeconomic pressures, geopolitical uncertainty, overproduction in China, and waning demand for EVs.
Analysts at Citi forecast a surplus of 84,000 tons of lithium carbonate this year, with that figure expected to increase to 100,000 tons next year. Inflation, high interest rates, and various barriers to EV adoption, particularly in the U.S. and Europe, are likely to temper global EV sales further, compounding the challenges facing the lithium market.
These factors, combined with policy uncertainty, have halted the upward momentum of lithium prices. The oversupply of lithium carbonate in China continues to exert downward pressure on prices, reflected in the declining costs of power battery cells.
In the Gutter…
By the end of June, lithium carbonate equivalent prices had dropped to approximately $12,610 per tonne, a stark indication of the challenges facing the industry. This surplus in global lithium supply is primarily a result of a production ramp-up over the last few years, when prices were at historical highs.
A substantial portion of this increased production stems from China, which saw a 44% surge in domestic lithium carbonate equivalent output in 2023 alone. On the mainland, production reached 275,000 tonnes, while Chinese operations in Africa and South America contributed an additional 30,000 tonnes.
Despite being the third-largest producer of lithium on a global scale, China's dominance in the refinement sector enables it to wield considerable influence over global price dynamics.
With control over 70% of the world's lithium-refining capacity, China is not only the largest consumer of lithium but also the hub of the most active spot market for the metal.
However, the market glut and subsequent price declines have put new lithium projects on hold, particularly affecting junior miners and companies in the intermediate stages of development.
Battery-grade lithium chemicals, which typically command prices between $20 to $25 per kilogram, are currently trading below $15 per kilogram. This steep price drop has made it increasingly difficult for companies to secure capital for new projects or to expand existing production.
In response to these market conditions, companies like Arcadium Lithium Plc are being forced to reassess their expansion strategies. Arcadium has announced the suspension or delay of two of its four expansion projects, including a revision of the timeline for its lithium carbonate projects in Argentina’s Salar del Hombre Muerto, which will now be completed sequentially rather than concurrently.
The financial strain on major Chinese lithium producers is particularly evident. Tianqi Lithium and Ganfeng Lithium, two industry giants, recently announced significant losses for the first half of the year.
Tianqi expects a net loss of up to 5.53 billion yuan ($760 million), a sharp contrast to the 6.45 billion yuan profit reported a year earlier. Ganfeng is forecasting a net loss of up to 1.25 billion yuan, down from a previous profit of 5.85 billion yuan.
Oil Companies Hedging Against Energy Transition Obsolescence
The convergence of interest between major oil companies and the lithium sector is becoming increasingly evident. In June, Occidental Petroleum formed a joint venture with BHE Renewables, a subsidiary of Berkshire Hathaway to explore lithium opportunities.
This move mirrors actions taken by other energy giants: in May, Equinor, the Norwegian state-owned oil firm, announced a partnership with Standard Lithium, a U.S.-based mining company. Even global oil titans like Saudi Aramco and ADNOC from the United Arab Emirates are beginning to explore the potential of lithium, signaling a broader industry shift towards this critical mineral.
The enthusiasm of large oil companies for lithium is both strategic and pragmatic. With global demand for electric power on the rise, these firms are tapping into their deep expertise in subsurface extraction and precision drilling—skills honed over years in the oil industry.
Extracting lithium from saltwater brine requires techniques familiar to these companies, closely mirroring their work in oil and gas. The permitting process is also similarly aligned, as is the refining of the extracted material, making lithium a natural extension of their operations, unlike the less familiar terrain of solar and wind energy.
Looking ahead, rising lithium inventories continue and persistently low prices may eventually lead to mine closures, converter shutdowns.
This is where the complications of the energy transition become painfully acute: prices have to be high enough to incentivize mining and investment, but low enough to not spark global-wide greenflation.
In a stable international environment, this is challenging enough. But combine it with the security-first framework embedded in every major industrial policy, and the risks sharply tilt to the upside.
Geopolitics at Play
Adding to these challenges, Biden's tariffs on Chinese-made EVs are likely to further diminish the competitiveness of these vehicles in the U.S. market, potentially leading to a reduction in Chinese exports.
Given China's significant role in EV production, a decrease in exports could further depress lithium demand within China, exacerbating the existing oversupply and price pressures.
The introduction of tariff policies in markets like the United States has led to a temporary increase in orders from cell makers, which could bolster upstream demand in the short term. However, while the downward trajectory of lithium prices is expected to persist, the pace of decline may decelerate.
Read more about the geopolitics of the energy transition below:
The Energy Transition: Navigating Thematic Investing & Geopolitics - Part III