In simple terms, Lithium gets mined by companies like Pilbara (PLS) before it goes through a complex chemical process to produce Lithium Hydroxide or Carbonate to refine/upgrade it for battery use. The Lithium Chemicals market is ultimately dominated by four key global players: Albemarle (ALB US), listed in the US, SQM headquartered in Chile, and two large Chinese operatives, Tianqi Lithium and Ganfeng Lithium. These companies are all integrated, in so far as they are exposed in the raw material side through to the refining chemical side i.e., they’re not just miners.
Lithium and the associated stocks are clearly on the nose, and the US$13.1bn Albemarle is undoubtedly no different. As subscribers would appreciate, Lithium prices are down over ~80%, and many are talking about persistent oversupply when demand from EVs is not meeting expectations. While the demand side is important, the picture remains positive with Global EV sales up 33% in 2023 to 21.4 million vehicles dominated by China at 46% of the total compared with 27% for Europe and 13% in the US. According to recent modelling by Bloomberg (and we do caution around taking this sort of stuff to the bank!), required lithium demand could jump 160% to 2.6 million tons of lithium carbonate equivalent globally by 2030, for compound annual growth of 15%, and if we have a serious crack at our net-zero goals by 2030, growth rates are more like 19% per annum to get to 3.4 million tons. The demand side is not the issue despite what many suggest.
New supply coming on stream to meet this demand has far exceeded expectations, and this has been the primary catalyst for falling prices. Most modelling suggests that supply will exceed demand in the coming years, which, all things being equal, leads to weaker prices. We think the Lithium market is slightly different, and many of these assumptions don’t factor in two crucial points. High-cost producers are shelving production, which is happening more and more, while we can be extremely confident about the demand side going into 2030 – batteries are essential to reach net zero, and they require Lithium.
- Hot markets overreact in both directions, and this sent the likes of ALB US above $300/sh in 2022, only to come crashing down. We think the high-quality, low-cost producers with good balance sheets are offering attractive risk/reward around current levels, hence our recent tilt towards the sector.
