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Lithium price tops out as China’s EV sales slow
Published on: Tuesday, January 24, 2023
By: Nikkei, FMT
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Lithium is the key material for making the most widely used batteries for electric and hybrid vehicles. (Unsplash pic)
SHANGHAI: Companies along China’s electric vehicle (EV) supply chain, from miners to battery-makers and car companies, have been riding high on an EV buying spree. And the price of lithium, a key raw material in most electric car batteries, has soared in tandem, drawing billions in capital from a diverse group of investors.

But the wave of demand downstream is breaking, leading analysts and industry insiders to predict a supply glut and plunging prices of the metal this year.

The spot price of lithium carbonate spent almost two years rocketing up, reaching a record high of around 600,000 yuan (US$85,530) per ton in November – close to 12 times the price at the start of 2021 – as demand outpaced supply, creating unprecedented profits for miners.

But the price of lithium has already turned sharply down, falling through December and early this year to 480,500 yuan per ton on Jan 16, off 20% from its peak two months ago. The price simply became too high, insiders and analysts say. Now the fast-increasing supply of the metal as well as forecasts for slowing EV and battery demand are expected to pile downward pressure on the price.

Investment floods in upstream

Lithium is the key material for making the most widely used batteries for electric and hybrid vehicles. The metal has historically been hard to come by because large deposits are rare, and the majority is scattered in small amounts across the earth’s crust, meaning extracting it is often wasteful and environmentally destructive. Mines also take time to set up, needing around one-and-a-half to three years before they can be exploited.

Building an EV battery production line can be done in 12 months. Miners couldn’t produce enough raw material to keep up with the rapid increase in downstream demand.

This time lag meant leading Chinese miners like Tianqi Lithium Co Ltd and Ganfeng Lithium Co Ltd raked in profits from their existing operations. The pair saw net profit attributable to shareholders jump 29 and five times year-on-year in the first three quarters of 2022, respectively.

Dozens of Chinese companies scrambled to get a piece of the booming market, investing in lithium projects at home and overseas in the past year. Besides traditional miners like Tianqi and Ganfeng, downstream battery and EV-makers have also stepped up investment in mining operations to secure their own supply chains.

In 2022, Tianqi Lithium had built an annual production capacity of 1.6 million tons of lithium concentrates – the unprocessed form of the metal extracted from rocks or brine – with mines and factories in China and overseas, according to a note from financial services provider First Shanghai Group.

Last week, Tianqi announced it had acquired Australian miner Essential Metals Ltd for 632 million yuan, giving it access to a mineral reserve of an estimated 11.2 million tons.

Analysts at Southwest Securities Co Ltd estimated Ganfeng Lithium had 900,000 tons in annual lithium concentrate production capacity.

In May, the world’s largest lithium battery maker Contemporary Amperex Technology Co Ltd, GCL Energy Technology Co Ltd and miner Chengxin Lithium Group Co Ltd competed for the majority stake of a bankrupt lithium mine in Sichuan province in an auction in which the hammer price of 2 billion yuan was 596 times the opening price.

Contemporary Amperex Technology Ltd, the world’s largest EV battery maker also known as CATL, ultimately acquired the mine for 6.4 billion yuan, according to a Tuesday notice.

Meanwhile, businesses with no direct connection to lithium mining have also invested in mines and battery-making. In November alone, four large investments were made by companies outside the lithium industry.

Shenyang Cuihua Gold and Silver Jewelry Co Ltd, a jewellery maker, bought a 51% stake in a Sichuan province-based lithium mine for 612 million yuan, saying the investment would diversify its business and strengthen its competitiveness. Shenzhen Shengxunda Technology Co Ltd, a tech company, invested 155 million yuan in a Henan province-based lithium mine, which drove up its share price.

Sundy Land Investment Co Ltd, a property developer, saw its share price double to 45 yuan within two weeks after announcing in March that it would participate in a group investment in an Argentine lithium mine.

Some of the company’s staff, including executives, sold their shares for 220 million yuan during the period, booking a 71.8% profit, prompting the Shanghai Stock Exchange to condemn Chairman Yu Jianwu for failing to disclose the transactions on time.

Sundy Land’s stock subsequently fell into a downward trend as the lithium project showed no progress and had dropped to 2.88 yuan as of Jan 17, off 60% from its March 22 peak at 7.22 yuan.

Downstream battery and EV manufacturers have complained that the surging lithium prices have piled up cost pressure as they were not able to quickly pass on the price hike to clients for fear of losing market share.

Last year, many Chinese EV makers failed to generate profit despite an expanding market. XPeng Inc and Nio Inc, two Nasdaq-listed EV companies, reported net losses of 6.8 billion yuan and 8.7 billion yuan, respectively.

However, with the increasing funding upstream, analysts expect that lithium supply will catch up with demand in 2023. Global supply could increase 33%, or about 370,000 tons, to 1.1 million tons of lithium carbonate this year, analysts at broker Minmetals Securities Co Ltd estimated.

They expect 120,000 tons of the new supply will come from Australian mines, including two owned by Tianqi Lithium and Ganfeng Lithium respectively, and 80,000 tons from China.

Analysts at Zheshang Securities Co Ltd estimated there could be a glut of lithium supply as soon as the second half of 2023 as 65% of new supply this year will be unleashed from June through December.

Liu Jincheng, chairman of China’s sixth-largest battery maker, Eve Energy Co Ltd, in November warned of an approaching supply glut of both batteries and the raw metal input this year.

Slowing sales growth

As supply expands, demand for lithium is expected to be subdued by slower EV sales growth, a likely consequence of the Chinese government abolishing EV and hybrid subsidies at the end of 2022.

Last year, more Chinese people bought EVs or hybrid vehicles as both the central government and local governments issued subsidies and offered tax breaks to buyers as part of efforts to shore up sluggish economic growth and push ahead with the green energy transition.

China extended its exemption on the 10% purchase tax until the end of 2023 as a buffer to the price hikes on vehicles, which have already begun. Chinese carmakers have started raising prices to pass on higher costs due to the subsidy’s termination and raw material price hikes.

BYD Co Ltd, China’s largest EV maker, said its new cars would be priced 2,000 yuan to 6,000 yuan higher beginning Jan 1, depending on the model. Most of BYD’s rivals have followed suit, except for a few, including US giant Tesla Inc and XPeng.

Market insiders expect EV and hybrid vehicle sales to continue rising but at a slower pace than last year. They see somewhere between 7.5 million to 9.4 million units sold in 2023, which would be 12% to 40% higher year-on-year. For 2022, sales surged 95.6% to 6.9 million units, according to data from the industry group China Association of Automobile Manufacturers.

Weaker sales forecasts have already affected EV makers’ buying activity, said an industry analyst: “Carmakers are slowing down buying batteries as they are cutting inventory amid a cautious stance.”

Miners are already seeing the impact of the closing gap between lithium supply and demand on their share prices. Tianqi Lithium and Ganfeng Lithium saw their stock prices drop 41% and 34%, respectively, from their 2022 highs in early July.

Carmakers, however, can expect to see a boost in profitability, as lithium and battery prices are set to slide, according to a Tuesday note from the China Passenger Car Association, another industry body, adding that EV demand will be underpinned by customers shifting from fuel-powered vehicles to EVs.

One brokerage analyst expects the price of the raw material to bottom out at 450,000 yuan per ton – a more comfortable price this year for battery and battery component makers.