Lithium gets a boost, but oversupply remains a threat

Lithium, which is used to make batteries for gadgets and electric vehicles, has had its ups and downs in recent years. Its price rose sharply in 2021 and 2022, but a subsequent crash has wiped out all those gains. Lithium prices are now down almost 90% from their 2022 peak.

Growing adoption of electric vehicles, especially in China, has boosted demand, but supply has grown even faster. That, along with a slowdown in EV sales outside China, has pushed lithium prices lower.

It’s no wonder investors were excited when unconfirmed reports emerged last week that Chinese battery giant Contemporary Amperex Technology, or CATL, had suspended production at one of its lithium mines. UBS said the mine accounted for about 5% of global supply.

According to domestic Chinese media, CATL did not confirm the suspension but said it was making changes to its production. Lithium futures traded in China have risen about 4% since last week’s reports, while shares of lithium miners around the world have also surged. U.S. Albemarle rose 14% and Australia’s Pilbara Minerals gained 19%. Their shares are still well below their 2022 highs.

With prices falling so low, supply cuts seem inevitable, with producers making small profits or even losses. For example, UBS has estimated that current lithium prices are already below CATL’s cash cost of production. Of course, because CATL is an integrated battery producer, it may have a greater tolerance for losses in one part of its business. But overall, prices should not fall much below this level if global production is to remain economic.

Still, lithium prices aren’t expected to rebound sharply. China’s stockpiles of lithium carbonate, a lithium-based compound used in batteries, are still at a historic high of 130 kilotonnes, according to JP Morgan. And more supply could come online, especially if prices start to rise again. Goldman Sachs has estimated that supply next year could be 57% higher than demand. Compared with the previous slump between 2018 and 2020, Chinese lithium producers have more cash, according to UBS, meaning they could continue their expansion plans.

The worst may be behind us for lithium stocks, but no significant growth is expected for now.

Write to Jacky Wong at [email protected]