Lithium Recovery Could Be A Case Of Too Far, Too Fast

Electric vehicles can be quick off the mark thanks to the instant power released by their lithium batteries, but it could be a case of too far, too fast, for lithium miners which have rocketed this week on reports of a big Chinese lithium mine being ordered to close.

Australian listed Pilbara Minerals is up 34% at A$2.28 while IGO, a partner with China’s Tianqi in the world-class Greenbushes mine, is up 15%.

Lithium is not in short supply. (Photo by Lucas Aguayo Araos/Anadolu Agency via Getty Images)

Anadolu Agency via Getty Images

Both have benefited from the temporary suspension of work at the Jianxiawo mine operated by the world’s biggest manufacturer of batteries for electric vehicles (EVs) China Contemporary Amperex Technology (CATL).

According to reports from China, CATL failed to extend a mining permit which expired last week, sparking speculation that a massive surplus of lithium overhanging the market could soon start to fall with a future shortage and higher prices possible.

Investors with an appetite for lithium and other battery metals such as nickel and cobalt have been hoping for a recovery since prices started to collapse three years ago, eventually dragging lithium down by 80% and forcing mine closures around the world.

Chinese mines were largely saved from the worst effects of the crash but are now seen as being guilty of over-production.

An added problem for battery makers is that while the Chinese market for EVs is hot the rest of the world is less excited, and the U.S. is proving to be reluctant to switch from internal combustion engines.

Traded in a variety of forms, lithium after it is mined sells as spodumene (containing close to 6% lithium metal).

Over the past three months the price of spodumene has been edging up from less than $700 a ton as concern grew about a crackdown by Chinese authorities on mines which have been producing above their license conditions.

But the 12% price surge yesterday to $925 a ton took investors by surprise, triggering a rush into lithium miners, potentially pushing them well ahead of the market for the metal.

UBS, an investment bank, said in a research note that leading Australian lithium companies were trading as if the metal price was between $1150-and-$1300/t.

Overpriced Miners

The bank has sell recommendations on both Pilbara and IGO with Pilbara tipped to fall from last sales of A$2.26 to A$1.60 and IGO to fall from A$5.37 to A$4.80.

“Recent events have highlighted that spodumene prices at less than $700/t are unsustainable and while we have more to learn about the China crackdown on mining licences the actual supply disruption could be more muted than equities might suggest,” UBS said.

Another investment bank, Citi, said it expected the Jianxiawo mine to remain closed for two-to-three months with lithium miners currently pricing in a spodumene price well above the market for the metal.

Macquarie Bank also warned that while the lithium market last year was driven by fundamental supply and demand it is currently being driven by macroeconomic sentiment fueled by anti-involution policies (a Chinese Government attempt to curb aggressive competition).

Quick Reversal

“Capital markets via futures contracts appear to be a greater driving force currently than industry supply and demand fundamentals,” Macquarie said.

“If the production suspension expectations are not met, sentiment could quickly reverse.”

Macquarie said that if the market reverts to pricing on supply and demand fundamentals lithium miners could quickly correct.