Lithium out of the woods soon? Not quite yet according to WoodMac

Wood Mackenzie’s latest report on the lithium market has trashed hopes of the price plunge reaching its floor and caused immediate damage with Liontown Resources (ASX: LTR) seemingly being its first casualty as a syndicate comprised of the biggest Australian banks dropped a juicy AU$760 million loan offer to the miner. As a result Liontown announced that it’s putting the brakes on their 4Mtpa expansion plans, sticking to their initial 3Mtpa nameplate capacity target.

To provide some relief to its investors however, LTR also indicated that they are fully funded to complete construction of their Kathleen Valley project and are sticking to their guidance of first ore mid 2024, however the question remains: will the company be able to start and sustain operation during early stages when more often than not operating costs are high, with the current spodumene pricing environment spotting around the $850/t and a long term forecast in the $900’s/t according to WoodMac? That’s where things may turn sour for this project…and a whole bunch of other companies that don’t have yet deep pockets and roots into this market.

But does the Wood Mackenzie report hold any water? Let’s have a look at some of their claims:

“We will see the expansion of Australian assets and many global producers entering the lithium landscape, putting pressure on the prices…”

This was certainly the vibe when spodumene and lithium chemicals price seemed to be heading to the sky and beyond, however with prices now below the $1,000/t mark for the former and pointing towards the $10,000/t mark for the latter the above claim might not quite resonate anymore with miners and refiners. We have seen already a behemoth like Albermale taking cost reduction measures and halting the development of new supply infrastructure, IGO reducing their sales volume, Core Lithium halting mining operations and Liontown not going ahead with their ambitious 4Mtpa target, not to mention the myriad of lithium explorers and aspirant developers that will suffer from the natural stock depreciation triggered by the slump in lithium prices. In light of the above, it is fair to state that any price forecast model needs to be re-adjusted to account for the loss or delay in projected new supply, which will naturally result in an increase in prices.

But the next few lines are probably the most interesting (and perhaps contentious) ones:

“Regarding lepidolite production, Wood Mackenzie forecasts a strong growth in supply in the coming years, after which supply will level out”.

“A large proportion of the growth will be through investments by CATL, providing a strong integrated supply into the world’s largest battery producer and, therefore, subject to strategic considerations.

“The growth of lepidolite supply in China largely depends on local governments’ mining and smelting permits and, of course, margins.

“There are challenges to be dealt with for lepidolite as the amount of lepidolite consumed for lithium carbonate conversion is also significantly higher than the spodumene, given the lower grades of lepidolite. Therefore, an increase in the supply of lepidolite will likely be affected by ESG concerns.”

But here is where comments like this have to be taken with a grain of salt, and I refer to the underlined sentences from the above paragraph:

·       “The growth of lepidolite supply in China largely depends on local governments’ mining and smelting permits…”:

To me this comment implies that the extra supply Wood Mackenzie refers to is not coming from currently approved projects, therefore significant risk from delayed or unapproved permits still exists for this supply to actually come on line.

·       “…and, of course, margins”:

Aha! The key word MARGINS. It is well known that any lepidolite mining and refining operation is at best marginal, and quite often they just don’t make money, let alone in the current weak pricing environment and with such a lame pricing forecast as expressed by Wood. Yeah yeah, but they are mentioning the advantages of vertical integration blah, blah, blah…but the few dollars saved by means of transport cost reductions quite probably won’t offset the huge extra costs in the form of energy consumption, low mass yield, waste management, etc, that are intrinsic to the extraction of lithium from lepidolite. I mean, lepidolite processing carries big inefficiencies at every step of the supply chain: mining, concentration, refining…and although you may be thinking about transport cost saving, well…not so fast as the cost per unit of lithium metal is far higher than that of spodumene due to the much lower lithia content of lepidolite.

·       “There are challenges to be dealt with for lepidolite as the amount of lepidolite consumed for lithium carbonate conversion is also significantly higher than the spodumene, given the lower grades of lepidolite…”:

As I mentioned before, extracting lithium from lepidolite is quite inefficient compared to spodumene due to the former’s much lower quality. A 2022 paper by Gao, T, et. Al, from the China Geological Survey estimates that the amount of lepidolite concentrate required to produce one tonne of lithium carbonate is nearly 18 tonnes, whereas the amount of spodumene required to produce the same tonne of lithium carbonate is estimated at about 8.7 tonnes.

·       “…Therefore, an increase in the supply of lepidolite will likely be affected by ESG concerns.”

Off course it will be due to the enormous amount of waste generated and the risk of such waste producing a significant impact on the environment and any nearby population. Take also into account the Battery Passport to be introduced by the European Union from 2027 for any battery used to build an EV as a mean to ensure adequate ESG standards and we have yet another hurdle that lithium produced from lepidolite will have to face.

So, when will lithium be out of the woods then? Only time and the financial resilience of Chinese lepidolite miners and refiners will tell, but one thing is clear: the lithium market is still pretty young, facing high volatility as it matures and finds its balance, but it is certain that at current prices the market is heavily imbalanced (as it also was at the peaks of 2022) and this will result on new supply being cut off or postponed and therefore prices bouncing back.