Crash in Lithium Prices: A Boon for EV Buyers or Unsustainable Trend?

Prices of the so-called ‘White Gold’ has been declining for the past few months. Lithium is a common ingredient in almost all electric-car batteries we use today. The drop in commodity prices has made it easier for carmakers to cut prices for electric vehicles. For instance, last month, Tesla lowered the prices of its two most expensive cars, the Model S sedan and Model X sport utility vehicle, by thousands of dollars.

While the fall of lithium may come as music to buyer’s ears, the sustainability of this fall is questionable.  Some analysts said the falling price of lithium was caused by short-term factors like slowing sales growth in Europe and China after subsidies for electric car purchases expired. But other industry experts said the drop suggested that new mines and processing plants were solving the lithium problem sooner than many analysts had thought was possible.

China’s Lithium Dominance

Over the past two decades, China has emerged as a dominant force in the global lithium battery supply chain, despite not having the world’s largest lithium reserves. China has been the single largest consumer of lithium-ion (or li-ion) batteries for over half a decade now.

According to BP’s Statistical Review of World Energy 2021, the country only held 7.9 per cent of the world’s lithium reserves in 2020. But the country aces it when it comes to manufacturing the metal. China is estimated to have 60 per cent of the world’s capacity for processing and refining lithium.

China’s dominance in the EV lithium battery market was not a coincidence. According to a report by the Institute for Defense Analysis (IDA), Chinese battery maker BYD entered the EV market by acquiring a Chinese EV automaker in 2003 and produced EVs with batteries from its vertically-integrated domestic supply chain. Additionally, the Chinese government has implemented policies to encourage the adoption of EVs and subsidized domestic battery makers such as CATL since 2015, providing them with a cost advantage over foreign-owned competitors operating in the country. Although the subsidies are phased out, they have given Chinese battery makers a head start in global competition. China has also assiduously courted regimes and countries with Lithium reserves, to maintain a tight grip on global supplies,

While the rest of the world did not devote as much capital towards this industry, the Chinese government provided financial incentives to support it. Many countries shifted their mining operations to China due to its cost advantage resulting from lower labour and environmental costs. As a result, the rest of the world is now approximately a decade behind China in this field.
Most lithium refineries are in China, managers and engineers have developed a clear lead in understanding and building efficient refineries.  So, any action the Chinese players take now has a ripple effect across the supply chain in the EV sector. Thus, it’s safe to say, the anomalies in lithium prices may have a direct root in China’s market.

The Trend of Lithium Prices

Ever since electric mobility came into vogue, lithium carbonate prices soared. After achieving highs in 2017 and 2018, prices fell in the second half of 2018 and further went down during the corona crisis in 2020. From 2021, the trajectory got reversed and the prices continued to rise, achieving historic highs in November 2022.

 

However, since November last year, Lithium carbonate prices have slipped, shedding more than half their value.

What’s Happening in China?

The trend of falling Lithium prices that kicked off in November last year continues in April 2023. In the first week of April, the lithium carbonate prices dropped by 55 per cent year-to-date, falling to less than CNY 229,500 per tonne, which is the lowest it has been in almost 16 months. This decline can be attributed to the increase in production and the decrease in demand, causing a supply surplus this year.

Moreover, the Chinese government’s decision to end cash subsidies for households purchasing new energy vehicles has further intensified the downward pressure on lithium, leading to abundant stocks. To take advantage of subsidies, battery producers overproduced batteries at the end of 2022, resulting in unsustainably high inventories and the sale of goods at a significant discount, with sharp cuts in all streams of the supply chain. This has added to the bearish pressure in the near term.

Setting the Price Floor

So much so, to halt plummeting prices, China’s top lithium producers, including Tianqi Lithium and Ganfeng Lithium, have reportedly agreed to establish a minimum price of 250,000 yuan or $36,380 per tonne of lithium carbonate.

Will it Go Down Further?

The views are divided on this front. Analysts like Goldman Sachs have forecast that lithium carbonate supply will grow at a brisk 33 per cent annual clip, outpacing demand, which will only grow at 25 per cent per annum. The mismatch between the two market forces will depress lithium carbonate prices even further with prices expected to sink to $34,000 a tonne in the next 12 months, from around $53,000 per tonne currently, good for another 36 per cent decline. This is hardly likely to go down well with Chinese refiners.

Many analysts expect the slowdown in the lithium market, and the EV market, to be temporary. For instance, Albemarle Corp. ascribed the lower car sales in China to temporary weakness due to the early Lunar New year but has predicted that China’s EV market will still expand a healthy 40 per cent this year. Chinese lithium battery and related manufacturers will be hoping that’s the scenario that plays out for them.