5 Feb, 2023
Lithium demand destruction looms as project delays, cost pressures mount
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Costs have surged at Liontown Resources' Kathleen Valley lithium project in Western Australia, pictured above, as supply chains continue to get more expensive. |
Australia-listed lithium producers may be rolling in cash from high prices, but the lithium rally is threatening to erode demand as buyers take a step back and consider other battery chemistries.
During the December 2022 quarter, Australian lithium producers, including Pilbara Minerals Ltd. and IGO Ltd., saw profits soar year over year amid higher realized prices.
But Jarden Securities equity research director Jon Bishop said prices might be reaching the point of driving buyers away.
"[Lithium producers will] make out like bandits over the next couple of quarters, I have no doubt," Bishop said. "Equally, there's been clear evidence that lithium buyers are taking a step back, they don't want to keep bidding up with prices so high because it becomes unsustainable. They'll kill their margins. So you're going to see demand destruction."
Just as battery-makers slashed their cobalt intensity in part to cut costs, high lithium prices will incentivize investment in alternative technologies, Alberto Migliucci, CEO of resources investment banking advisory Petra Commodities, said in an interview.
Bishop sees end users turning to sodium-ion batteries, which have become increasingly popular among automakers in China, where the batteries' lower energy density suits city driving.
"Inflation is hitting at a time when [electric vehicle supply chain entities] are struggling with developmental costs and processes around upscaling manufacturing, combined with all the research and development required to make the products work properly," Hedley Widdup, fund manager at investment company Lion Selection Group, told S&P Global Commodity Insights.
Labor shortages and delayed deliveries of processing equipment caused Mineral Resources Ltd. to push back its Mount Marion expansion project in Western Australia, which would increase the mine's capacity to 900,000 tonnes per year.
IGO and joint venture partner Tianqi Lithium Corp. will delay by six months a final investment decision on train two of the Kwinana lithium hydroxide plant in Western Australia as a "prudent" approach to manage costs, IGO acting CEO Matt Dusci said on a Jan. 31 analyst call.
Allkem Ltd. also flagged a delay at its Sal de Vida project in Argentina, with first production now expected by mid-2024.
Rising operating costs are delaying the next wave of projects and making the whole supply chain more expensive.
Pilbara Minerals increased the cost estimate of its P680 expansion project in Western Australia to A$404 million from A$297.5 million in December 2022.
"Operating costs continue to be elevated to where they were 12 months ago, still being impacted by labor shortages in West Australian mining sector, supply chain disruption and general inflation pressure, and high mining costs in moving more waste," Pilbara Minerals CFO Brian Lynn told a Jan. 20 earnings call.
Liontown Resources Ltd. also increased the capital cost estimate for its Kathleen Valley project, also in Western Australia, to A$895 million, 89% higher than the 2021 definitive feasibility study estimate of A$473 million.
"When we did the definitive feasibility study, the hourly rate of site-based people we had accounted for, quite comprehensively, was A$195 [an hour]. The tendered prices have come in at well over A$250 [an hour]," Liontown CEO Tony Ottaviano told a Jan. 20 analyst call.
Jarden Securities' Bishop called back to the market axiom that the "greatest cure for high prices is high prices."
"There has to be a point where these sorts of cost escalations bite, and governments aren't just going to continue to shell out taxpayers' money" to incentivize clean energy technologies that require lithium, Bishop said.
Analysts from Commodity Insights' Metals and Mining Research team see a weaker macroeconomic environment in 2023, where the lithium market will move into surplus and prices will decline from their 2022 peak.
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