Sunday, 3 July 2016

Joe Lowry: The Top Five Lithium Market Myths.

Copyright Global Lithium LLC, used with permission.

  Joe Lowry is sharing with us another insight into his "Opaque Lithium Kingdom" and I will share along with his previous post some links providing more info on the $4.5 Billion giant from China Ganfeng Lithium and its approach to secure the supply of lithium raw materials.

"Ganfeng exports and produces over 20 unique lithium products. In addition, it has developed an innovative patented technology that significantly shortens the standard production process. To support their expanding global operations, Ganfeng has taken steps to secure its future supply by investing heavily in a Canadian company called International Lithium Corp (TSX.V: ILC)." Peter Cole.

Joe Lowry: Argentina Lithium Update - May 2016.

Copyright Global Lithium LLC, used with permission.

  "Joe Lowry brings us another update from his Lithium Kingdom, this time, he shares his views and observations from Argentina, he is a must follow for everybody in our very small and explosively growing Lithium Universe at @globallithium. His call on the building up lithium shortages in 2015 was spot on the money: lithium increased threefold above $20,000 per LCE T from $6,000 just from the last summer!
  I will provide my previous  post with his insights into the "Opaque Lithium Kingdom" and you can study his work on the links. His work is very timely, as I believe that the next stage in the advance of the lithium market will be separating the hyped dreams from the real people with dreams and solid projects under development. Read more."

Lithium 2.0 Launch: Security Of Supply - Galaxy Resources To Buy General Mining In Lithium Takeover.

  "This chart of lithium price in China is keeping awake at night very many people now in our very small industry. Quite a lot of them have totally missed the launch of Lithium 2.0 and now the security of supply is the major geopolitical issue. Tesla is still relying on Panasonic to supply lithium cells and a lot of people are relying on the "Lithium Found in Nevada" under Tesla's Gigafactory floor.
  Ganfeng Lithium: $4.5 billion giant from China is the strategic partner of International Lithium and now financing two of our J/V operations in Ireland and in Argentina. We are going where Lithium is and not just the hype around it. As we have discussed before, Lithium 2.0 is now for real as we have the real electric cars finally on the road and GM Bolt and Tesla Model 3 bring us mass market for electric cars.  Cheap lithium batteries change everything. Exponential growth in EVs sales is following by deployment of Energy Storage now.
  This Lithium M&A is pointing out another very important quality of Lithium 2.0 Launch: separation of dreams from the real people with the real projects, capital and technology to put them forward. There are only very limited number of quality lithium projects and even less capable teams with access to the capital and technology, like in the case of International Lithium and Ganfeng.
  Galaxy is back from after the death experience and moves into the "New Lithium Top Six" taking over the "Old Lithium Big Three". Albemarle, SQM and FMC are being chased by very aggressive Ganfeng Lithium and Tianqi from China. Now we can add Galaxy to this very small space for investors to play around with the security of lithium supply for the future when all cars will be electric. That chart of lithium price shows what is happening when in the last 5 years out of 80k T of LCE expected new production annually only 18k T was put on-line and when Gigafactory and Megafactories are only coming on. Read more."

Joe Lowry:

Myth - an unfounded or false notion
 As the lithium grows in importance, the amount written on the topic has increased exponentially. Unfortunately, many people writing about the market have little or no experience in the lithium industry. Much of what appears online or in print is based on false assumptions. I rank the following as the top lithium market myths and misnomers.  
 1) The “Big 3” lithium oligopoly “controls” the market.
For most of the last two decades, three companies ALB/Rockwood, SQM and FMC were the dominant suppliers of lithium chemicals in the global market. However, last year the “Big 3” contributed less than 50% of global supply and their percentage will fall below 40% by 2020 even will ALB’s expansion.
The addition of several new spodumene sources (Mt Cattlin, Mt Marion, Pilbara and at least one new player in Quebec) by the end of the decade will continue to increase the hard rock share of the market. 
This is probably a good time to mention a “mini myth” – let’s call it a “sub myth”: brine is the “best" source of lithium. Yes, lithium chemicals produced from world class brine are lower cost than hard rock based production; however, it is clear that the advantages of spodumene have greatly exceeded the cost disadvantages in recent years. It has been the growth of “high cost” spodumene capacity that has kept lithium supply in balance with demand over the past few years and will keep it in balance for at least the next three years.
Over the last two decades, the “Big 3” mantra of “all you need is us” has proven to be nonsense as their failure to execute timely expansions has led to the rise of Tianqi, Ganfeng and other spodumene converters in China. The China converters were initially enabled by spodumene produced by Talison in Australia. The failure of the "Big 3" to adequately supply the market led to the development of new “hard rock” projects in Australia and has made Western Australia the leading producer of lithium values globally and China the leading producer of lithium chemicals. Chile is now #2 globally in lithium chemical production and will likely slide to #3 by 2021. So much for Chile’s low cost position being an insurmountable advantage.
The CEO of ALB has a dream of capturing 50% of the demand growth from lithium ion battery. The reality is the “Big 3” combined do not have the proverbial “snowball’s chance” of capturing 50% of growth going forward. [Note to non native speakers of English, google “snowball’s chance in hell” for a full explanation of the last reference].
ALB's chance for 50% of lithium ion battery growth - like a snowball in hell
 2) The 300% price increase only applies to a small volume in China
The rapid price increases that started in China late last year were a surprise to most people that follow the industry – including me. Although I had called a significant spike in hydroxide well in advance of the the events in China, I did not see the same type of increase happening in lithium carbonate. Like many I was initially a little skeptical of how widespread the high carbonate prices would become and how long they would last.
By early Q1 of this year, it became clear that high pricing applied to the MAJORITY of sales in China not a small minority as ALB’s CEO tried to make the market and analysts following his company believe. ALB has a very limited share of the world’s largest lithium market although their participation will increase from minuscule to small in 2016 via their tolling program with multiple Chinese companies. For reference ALB exported ~3,800 MT of lithium carbonate from Chile to China in 2015. In an approximately 70,000 MT LCE market, ALB’s limited participation hardly makes them an unimpeachable source of China market knowledge.
Another non sequitur was espoused by ALB’s leader during a presentation in May with a number of analysts. On that occasion he stated: “nobody – not one of the major battery producers are buying on the spot market because it is not sustainable, right?” Well, actually – “not right”. Just to be clear, in many cases, battery producers don’t buy lithium directly - they buy cathode but the point is even if the cathode makers in China are buying on short term contracts, they are generally paying a high price. The same is true for some volumes going to cathode makers in Japan and Korea. The China export stats demonstrate this. 
Meanwhile, the delta between the “China/spot” price and the “Big 3” price is narrowing. FMC currently has some prices above $20/kg for both carbonate and hydroxide.  If ALB wants to keep their prices below $10/kg next year while all their competitors price at the “new normal”; I think the questions at their 2017 quarterly earnings calls will get much more interesting.
 ALB says publicly that high prices will cause “demand destruction”. We aren’t seeing much evidence of that. Even Elon Musk, whose mission it is to lower the overall cost per KWH of lithium ion batteries recently called lithium “the salt on the salad” and “not a significant cost item”. Certainly lithium ion battery makers would like all raw material costs to be at low levels but it is just as clear that $20/kg+ lithium isn’t going to kill the market for electric transportation or ESS.
 3) The “lithium market is in a bubble: think iron ore & uranium”
Let’s separate the lithium market from the market for lithium stocks. Two very different things. There has been a significant run-up in the prices of many small cap lithium stocks. I agree that the share prices of many junior lithium players are in “bubble” territory but that is a much different story than saying the lithium market itself is in a bubble. For more on junior lithium company stock prices – check out Chris Berry’s writings on the topic.
From my perspective, we are in the beginning of a long term cycle of significant lithium demand growth and are ending a cycle of significant underinvestment in lithium supply. No matter what certain “experts” say – supply and demand are NOT in balance. If the market is adequately supplied, why are we having the current price run-up?
Of course, the "Big 3" like the "market is in balance" story because they don’t want a bunch of new projects creating a long term over-supply. Meanwhile a company like FMC continues to take the benefit of higher pricing and sits on its hands with respect to adding lithium capacity. Who cares about the customer’s and shareholder’s long term best interest? FMC: “no risk – all reward” in the short term.
I have been in many meetings over the past few months with investors across Australia and Canada. The iron ore and uranium comparison seems to rear its head at least once in every discussion. My reaction is always the same, I put my hand over my mouth while I stifle a yawn and let iron ore and uranium scarred investors vent before saying: “I am not an expert on those two markets and don’t have a comment.”
I am still waiting for someone to compare lithium with the tulip bubble in Holland in the 1600s. Come on people – judge the lithium market by its own unique situation, do your own research and stop with the iron ore and uranium comparisons.
The lithium market itself is a LONG way from oversupply or bubble territory. Hell, we are still waiting for somebody to actually invest significant capital in a new project in Argentina since the political and investment climate has turned favorable. Can you hear me GXY, LAC and LIX…..?
Oh, and one more thing – lithium is not the “new oil” either.
 4) The Tesla Gigafactory is the most important lithium story.
Writing about $TSLA is the lazy man’s way to get “clicks” on the internet. Of course, I admire and appreciate the Tesla/Elon Musk story. On the other hand, the constant talk about Tesla does a great disservice to the global lithium narrative. Lithium is much more a story of production in Asia (China, Japan, and Korea) supplying the seemingly insatiable global demand for battery power. Last year, Tesla products accounted for less than 2% of global lithium demand. Even after the gigafactory begins operating, most if not all, of the cathode will be coming from Asia rather than being produced in Nevada.
Going forward, the “salt on Elon’s battery salad” will be lithium hydroxide produced by companies like Ganfeng and Ni Ke Guorun in China as well as FMC in North Carolina before being converted into cathode in Japan and then shipped to Nevada either as cathode or in finished cells produced by Panasonic. Don’t look for this scenario to change any time soon. No, gentle reader, the Clayton Valley of Nevada and Sonora area of Mexico are not important strategically to the future of lithium production (let’s call this “sub myth” #2).
The major stories in “e-transportation” demand will be played out in China, India, the rest of Asia, Europe and to a lesser and slower extent “range anxiety prone” North America. By the way, check in with Benchmark Minerals for details on all the other gigafactories being built in Asia.
Final comment on Tesla - if the gigafactory is successful, Elon Musk's "lithium salt" bill is going to be very high whether in the form of hydroxide or cathode.
 5) The “Saudi Arabia” of Lithium
Both writers and investors seem to love this term. Normally Bolivia is tagged as the Saudi Arabia of lithium but sometimes it is Chile. Most people who call Bolivia by this name are blissfully unaware that Bolivia’s reserves remain untapped below the landlocked salt crust of Salar de Uyuni.
Just as lithium is not “the new oil”; neither Bolivia nor Chile is the Saudi Arabia of the lightest metal. In the case of Bolivia, it is really hard for a country not commercially producing lithium to be reasonably compared to a major oil power.
Although applying the moniker to Chile is not as far fetched – it might have been more appropriate a few years ago when the Atacama producers reigned supreme. Unfortunately, it is likely that Chile will not even be the #1 producer in South America let alone the world in just a few years’ time.
Of course this is just a sampling of myths and misnomers in the lithium world. If you have a favorite I missed, you know where to find me.

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