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Lithium set to make comeback in 2020 as China holds on to EV subsidies


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Lithium set to make comeback in 2020 as China holds on to EV subsidies

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Core Lithium's Finniss lithium project in Australia's Northern Territory.
Source: Core Lithium Ltd.

Lithium experts say the market will bounce back in 2020 on the back of expected higher electric vehicle uptake in Europe, and China abandoning plans to lower EV subsidies again this year.

Core Lithium Ltd. Managing Director Stephen Biggins, whose company is timing the development of its Finniss project in Australia's Northern Territory to sync with an expected shortage in two years, noted in an interview that lithium developers and producers' share prices had surged between 15% and 25% so far in 2020.

He said this reflected "the market looking forward at a demand scenario for lithium that remains very strong."

The chart below shows Core has performed favorably with other producers in terms of stock price percentage gain since the end of 2019, a year which independent Australian analyst Peter Strachan said in an interview was a "big flop" for lithium, with prices dropping by as much as 70%.

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The repercussions of 2019 are still being felt, as evidenced in Sociedad Quimica y Minera de Chile SA and Wesfarmers Ltd. deciding to defer final investment decision on the West Australian Mount Holland lithium project to the first quarter of 2021, citing a need to further optimize its design and to slash costs.

While lithium's oversupply in 2019 is widely believed to stem from China not building processing plants fast enough for all the lithium being mined, Biggins said there's "plenty of capacity ready to go in China ... it's more about the downstream demand signals [needing to be] strong."

The lead time to move material from a mine through the battery supply chain into an EV generally takes years, thus as EV sales pick up again, the raw material supply needs to grow years ahead of the demand, he said.

Biggins expects EV sales to pick up in 2020, particularly in light of China's announcement in January that there would be no significant cut in new energy vehicle, or NEV, subsidies.

Core already has an off-take commitment from Sichuan Yahua Industrial Group Co. Ltd. unit Ya Hua International Investment and Development Co. Ltd., one of China’s largest lithium hydroxide and carbonate producers.

EV news portal InsideEVs reported Jan. 14 that plug-in electric car sales in China have been falling every month year over year since July 2019, when subsidies were halved and limited only to vehicles with a New European Driving Cycle range of at least 250 kilometers.

This drove NEV sales down from 1.3 million in 2018 to 1.2 million in 2019, when they had been expected to reach 2 million.

China EV incentives

While China reducing subsidies in 2019 crippled its EV sales, Biggins said Core's many discussions in the country indicate the government is looking to not only maintain its incentives, but also strengthen a number of its regulatory positions on the use of EVs, in order to meet its future sales targets.

One such regulatory scheme includes the ability to buy and register an EV straight away, as opposed to being on a "very extensive" waiting list for a combustion engine car in China.

Other regulations cover the ability to drive into the cities with an EV as opposed to "very strict control on which combustion engine cars can be in what sort of use at what time," as well as opportunities for EV parking and ride sharing.

Given all this, Biggins said he "wouldn't be surprised if there was a significant flip in supply and demand balance in the lithium sector in 2020."

Ernie Ortiz, CEO of Canadian group Lithium Royalty Corp., an affiliate of Waratah Capital Advisors Ltd., said China is "likely to improve existing policies to better reflect and apply the underlying incentives" to EVs, as well as potentially adding more benefits to EVs outside of subsidies.

He also told S&P Global Market Intelligence that EV demand in Europe could double in 2020.

In June 2019, Lithium Royalty Corp invested A$8.1 million in Core Lithium for a 2.5% royalty over production from Finniss, after buying Red 5 Ltd.'s royalty entitlement in June 2018 from the Galaxy Resources Ltd.-operated Mount Cattlin lithium mine in Western Australia.

Ortiz said Finniss's high-grade, low-cost and simple processing, along with the considerable mineral exploration upside to come, were key factors to his company investing in Core, and he is open to increasing that investment down the track.

This was evidenced by Core reporting Jan. 16 that it had hit a "world-class" intersection of 107 meters at 1.70% lithium oxide at Finniss's BP33 prospect, where two other reverse circulation drill holes recently intersected spodumene pegmatite.

Biggins said in an interview that the announcement was for one of the best lithium drill intersections he saw globally in the past year.

Those results will see a substantial upgrade to BP33's mineral reserve due in February and underpin an increased mine life at Finniss, where mine life and updated feasibility studies should be done in the current half, at which point Core will pursue finance markets with an eye to reach an investment decision by 2021.