Lithium: Is the Worst Over? Lithium: Is the Worst Over?
The lithium carbonate spot price rose by almost 15% in the first half of March before retreating, ending the month up 5.35%, making its overall year-to-date rally 9.46%. Lithium has begun recovering as its precipitous decline from previous highs appears to have ended (see Figure 8).
However, even with lithium’s recent increase, we believe the current price remains below a sustainable level and will need to rise to incentivize supply in the longer term. In the meantime, the lithium supply is shrinking, with project curtailments and cuts to lithium growth plans likely to exacerbate significant supply deficits anticipated later this decade. Chinese supply has become susceptible to disruption. Much of China’s lower-grade and higher-cost source of lithium, lepidolite, is no longer economical. Further, China’s recent environmental probe in a top production hub may spur further disruptions.22
Bloomberg reports that as a result of these factors, “UBS Group AG and Goldman Sachs Group Inc. have trimmed their 2024 supply estimates by 33% and 26%, respectively, while Morgan Stanley warned about the growing risk of lower inventories in China.”23 Given the thinning market, investors with short positions may need to consider unwinding positions due to a potential market bottoming. There are significant short positions in several top lithium producers that due to these supply cuts, may be under threat. Short positions in Albemarle Corp. and Pilbara Minerals Ltd., for example, account for more than 20% of their outstanding shares.
Demand for electric vehicles (EVs) continues to increase, additionally bolstered by a stringent new rule in the U.S. that further limits auto emissions, thus compelling automakers to rapidly boost EV sales.24 In our view, there is no real alternative for lithium in EVs. Despite a perceived slowdown, global EV sales increased from 10.5 million in 2022 to 14 million in 2023, and are forecast to increase to 16.7 million in 2024. Ultimately, we believe EV penetration rates will continue to rise, potentially increasing demand for lithium and benefitting lithium miners.
National interests in the lithium market continue to develop. The industry is being transformed by the growing importance of reshoring and friendshoring, as well as new industrial policies and fresh investment. Lithium Americas received a record $2.26 billion loan from the U.S. Department of Energy to develop a Nevada lithium deposit.25 It came in the wake of General Motors’ $650 million equity investment in Lithium Americas, the largest investment by an automaker in a raw materials producer disclosed to date. The loan and investment together give Lithium Americas most of the capital it needs to fund an initial 40,000 tonnes per year of battery-grade lithium carbonate production (Phase 1) at its Thacker Pass mine in Nevada. The investment gives GM exclusive rights to 100% of Lithium Americas’ lithium production from Phase 1 for up to 15 years, and a right of first offer on Phase 2 production.
Similarly, in March, Australian producer Liontown Resources secured a A$550 million loan from Australian banks and government agencies as it aims to begin production this year.26
These loans represent a substantial step in strengthening various countries’ critical materials supply chains, and we expect the trend to continue to bolster critical mineral miners.
Figure 8. Lithium: Optimism Drives a Year-to-Date Rally (2019-2024)
Source: Bloomberg. Lithium carbonate spot price, $/lb. Data as of 3/31/2024. Included for illustrative purposes only. Past performance is no guarantee of future results.