Pilbara Minerals sees lithium supply crunch returning as mining costs rise

Pilbara Minerals Ltd. CEO Dale Henderson sees global lithium supply swinging back to deficit in the longer term as the sector confronts higher costs while demand for electric vehicles remains strong.

Pilbara Minerals — Australia's largest lithium producer and the world's third-biggest producer, according to S&P Global Market Intelligence data — produced 144,184 metric tons of spodumene concentrate in the first quarter of fiscal 2024, down 2% year over year.

Spodumene sales rose 6% to about 146,400 metric tons over the same period, but revenue fell 43% to A$493.1 million, reflecting a 47% drop in the realized price to US$2,240/t.

The Platts-assessed 6% lithium spodumene FOB Australia price had plummeted 75% by Oct. 20 from its record high of US$8,200/t on Nov. 18, 2022, and S&P Global Commodity Insights' metals and mining research team has observed lithium demand below expectations thus far in the second half of 2023.

"We are looking through this volatility to the longer-term structural deficit of the lithium supply chain," Henderson said on an Oct. 26 analyst call.

Henderson cited China Passenger Car Association data revealing 37% year-to-date growth in EV sales and a record-high 35% EV penetration for the third quarter of 2023.

The lithium market will have trouble meeting this demand because of its disaggregated supply chain, a lack of price transparency, "momentum buying, which sometimes is at odds with fundamental stock levels" in China, and "waves of sentiment-driven buying and destocking," Henderson said.

"This was further exacerbated by a large component of short-term contracts within the Chinese market," the CEO said. "Historically, there's been a rush of pricing upwards and a rush of pricing downwards. This all plays through to more volatile markets ... So it's not a straightforward landscape to navigate in the least. And it's very much ... symptomatic of a new industry moving forward. ... It certainly is maturing at scale."

Pilbara Minerals expects supply to be "challenged and higher cost" as "particular government regimes exert changes across lithium development projects."

"This fundamentally translates through to either reduced volumes, delayed volumes, ... reduced economic returns or all of the above," Henderson said, adding that Pilbara has an edge as an operator in Australia with Tier 1 assets.

Technical issues also continue to drag on Australia's fledgling lithium hydroxide industry, and Pilbara Minerals has observed "challenges with project startups and ramp-ups," the executive said.

"This was our experience. It takes time, and I don't know of any example of a lithium project coming up easily," Henderson said.

Adapting to price volatility

Amid all the struggles, Henderson said Pilbara Minerals has been able to weather falling prices better than others and to benefit from any price uplift due to its pricing mechanism, which is "different from other producers."

"Pilbara Minerals typically realizes those higher prices more quickly. Meanwhile, others in the market are slower to realize those higher prices. And conversely, as pricing comes off, the reverse is true, where our pricing is typically followed more quickly whilst others have lagged," Henderson said.

The company's quarterly statement said its realized prices of spodumene concentrate are "derived from a combination of pricing methodologies and pricing periods across the customer group linked to either spodumene concentrate prices as reported by price reporting agencies, or pricing formulas linked to lithium chemicals."

"Pricing periods used to adjust provisional pricing are typically a two-month period, including the month of shipment, which is intended to ensure final pricing is better aligned with the time of delivery of product to the end customer," the quarterly said.

Platts 6% lithium spodumene FOB Australia assessment is an offering of S&P Global Commodity Insights. S&P Global Commodity Insights is a division of S&P Global Inc.

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