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Lithium oversupply to continue in 2020

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Lithium oversupply to continue in 2020

The oversupply of lithium chemical compounds that forced prices down in 2019 should persist in 2020 as the "electric vehicle revolution" will not accelerate in tandem with recent -- and upcoming -- increases in supply.

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Although the lithium-ion technology is employed in a wide variety of applications, including virtually all electronic devices such as mobile phones and tablets, as well as in advanced energy storage systems, there is a consensus that lithium's relevance in the coming years will be directly proportional to the penetration of EVs.

The reason for that is the huge difference in the battery sizes: while a Tesla car is fueled by batteries of up to 90 kWh, 5-6 kWh should be enough to charge an iPhone 11 for one entire year.

As for energy storage, the market has been growing globally, with South Korea installing more than 4 GWh in 2018, and the US and China reaching the 1 GW installed capacity mark in 2018. In comparison, S&P Global Platts Analytics expects battery demand from passenger electric vehicles to exceed 150 GWh already in 2020 -- which translates into 128,736 mt of lithium carbonate equivalent next year.

Platts Analytics' forecasts for electric trucks range 24,994 mt of LCE in the low case to 49,989 mt in the high case, while stationary storage should add another 8,500 mt of demand. Although the forecast doesn't consider the demand from other applications, it is more conservative than other views the industry, such as that from major producer SQM. In April, the Chilean company expected demand to exceed 300,000 mt of LCE already in 2019.

In any of those scenarios for demand, the persistent oversupply is still certain. According to S&P Global Market Intelligence forecasts from September, world's total output should reach 560,000 mt of LCE in 2019 and exceed 800,000 mt in 2020. This increase would be reached mainly due to significant additions in Australia, Argentina, China and Chile.

The expected oversupply deepening could be even more dramatic if the recent bearish pricing outlook (generated by the already existing oversupply) didn't lead key producers to slow down their expansion plans. For example, US-based major producer Albemarle announced in its second-quarter earnings call the reduction on investments to increase lithium conversion capacity by 125,000 mt/year of LCE in the next five years.

The poor short term outlook also led several junior miners to revise their projects--and spurred skepticism amongst investors that could potentially help develop these new projects. According to several market analysts, 2020 will be a key year for the future long-term lithium supply: if some new projects don't find the required financing in the coming months, the current oversupply is likely to suddenly shift into shortage in a few years as electric vehicles spread out globally.

THE ANSWER FOR DEMAND IS IN CHINA

While the 2020 supply forecasts seem to have little room for changes as most of the considered projects are already running (and the cost savings from reducing output could be insufficient to offset the lower revenue), demand could have significant variations depending on how fast EVs get traction among consumers.

At least in the short term, the demand for EVs crucially depend on China, which produces almost two-thirds of all EVs sold worldwide due to the strong support from the government through subsidies in the past few years.

However, since last year the Chinese government has been cutting the subsidies -- which could be zeroed after the end of 2020.

The subsidy began in 2009 when central-level subsidies were given to selected public institutions in pilot cities for their NEV (new energy vehicles) purchases. In 2012, the government set out its first NEV industry development plan, which included targets such as NEV production, ownership and vehicle mileage. The subsidy program has since been widened to include all NEV purchases. The government has also put in place an array of nonfinancial incentives to encourage sales. As a result, China's NEV sales took off in 2015, when sales rose by 343% year over year.

In 2017, Beijing started tightening requirements and preparing for the total phase out of subsidies. Declines in NEV sales were seen after 2019 new policy started in place since July 2019, officials also warned that negative growth is expected for both NEV output and sales in 2019 while market is waiting for December figures.

CARBONATE OR HYDROXIDE?

The automotive industry is currently targeting to increase the range of EVs, which will depend on higher energy density batteries. The most common way to do it has been to employ nickel-rich cathode chemistries, such as NCA (a combination of nickel, cobalt and aluminum), which is already present in Tesla's cars, and NCM 811 (eight parts of nickel for one part of cobalt and manganese each), for example. Although the latter is the strongest in terms of energy density, safety issues have been delaying its mass adoption.

However, "while I don't think the NMC 811 will become the primary technology next year (nor in the near term), there are positive signs that the technology is going to increase its market share next year," said Felix Maire, senior analyst at Platts Analytics. "CATL, which is one of the largest battery manufacturers, announced this spring the start of NMC 811 mass production; a joint venture between SK Innovation and BAIC also finished construction this month in China of a 7.5 GWh manufacturing plant is starting the production of NMC 811."

The push towards nickel-rich chemistries should change the demand structure. While currently the cheaper lithium carbonate is the primary choice for most manufacturers, lithium hydroxide is expected to increase its relevance in tandem with the wider adoption of nickel-rich chemistries since it provides higher stability to these kind of cathodes.

-- Henrique Ribeiro, henrique.ribeiro@spglobal.com

-- Xinyue Zhang, xinyue.zhang@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com