Lithium Market Outlook: Will China's Spot Price Plunge Eclipse M&A's Optimistic Vision?

China: The China Lithium Carbonate spot price has experienced troubling setbacks, plunging 65% from a record high of CNY 600,000/t (US$87,272/t) observed in late 2022. While contract prices have managed to remain steady, spot prices for Lithium Hydroxide (US$40,000/t) and spodumene (US$3,810/t) have both dropped by approximately 1/3 to 1/2 from their recent peaks.

Despite this unfortunate trend, there is some positive news in the Lithium sector. Leading Lithium companies and industry analysts are, for the most part, still bullish on the substance in the mid to long term. A recent example of this sentiment is Albemarle Corporation's offer of A$5.2 billion (US$3.4 billion) at a 69% premium to acquire Liontown Resources Limited.

The Lithium Carbonate spot price in China experienced a spectacular surge in 2022 but now appears to be plummeting in 2023. The primary reasons contributing to this downward trend are the deceleration in China's new energy vehicle sales growth and the Chinese cathode and battery suppliers depleting their inventory while holding off on purchasing Lithium in hopes of securing a better price later. Moreover, the China spot market's liquidity has been rather low during the first quarter of 2023.

China witnessed a decline of 8% year-over-year in NEV sales during January 2023. This was mainly attributed to the discontinuation of federal NEV subsidies in China, along with the impact of the Covid-19 pandemic and the Chinese New Year falling in January.

However, things started looking up from February, with NEV sales in China rising by an impressive 56% YoY. In March, there was a further rise of 34.8% YoY in NEV sales. As a result, China experienced a YoY rise of 26.1% in NEV sales by the end of Q1/2023, with nearly 1.59 million units sold. It's worth noting that the first quarter usually records the slowest NEV sales in China, making the Q4/2022 to Q1/2023 seasonal slowdown another significant contributing factor.

The Lithium market's growth of 26.1% in Q1/2023 is commendable, considering the lacklustre performance in January. However, the market needs global plugin electric car growth to increase by 36% YoY to maintain the equilibrium between supply and demand. It implies that China's NEV sales growth rate of 26.1% in Q1/2023 falls short of the necessary 36% global growth rate expected for the year 2023.

Albemarle, the leader in the Lithium industry, has offered to purchase Liontown Resources at a significant premium of 69% to its 30-day volume-weighted average price. This move may be surprising during a Lithium bear market, but Albemarle is looking at the bigger picture. With projections indicating that Lithium demand is set to increase by 35 times from 2020 to 2037 or 13-42 times from 2020 to 2040, Albemarle is taking a long-term view of the market.

Liontown Resources holds a 100% stake in the Kathleen Valley Project, which boasts a rare tier 1 global resource status as one of the largest Lithium spodumene resources worldwide. With an estimated 156MT at 1.4% Li2O, this project is among the top five Lithium assets globally. Currently in its advanced stage, the project is set to commence production in mid-2024, with initial spodumene output expected to reach approximately 600,000 tonnes per annum.

Albemarle has a clear vision of the Lithium market and is adopting long-term strategies to benefit from it. Following their successful acquisition of Rockwood Holdings Inc. (previously owning the Greenbushes Mine) for a whopping US$6.2 billion in 2014, the company is now eyeing another tier 1 long-life mine in Australia. The motive behind this move is to capitalize on the forthcoming rise in the electrification of automobiles and secure the potential upside opportunities likely to emerge over the next several years.

Auto OEMs are expected to face a major obstacle soon - securing batteries, specifically the key component Lithium. The Lithium market in 2023 has been a year of contradictions. On one hand, the collapse of China's spot Lithium Carbonate price suggests a bearish outlook. On the other hand, a multi-billion-dollar takeover offer with a 69% premium price suggests a bullish outlook.

In essence, the recent drop in Lithium prices can be attributed to China's Q1/2023 NEV slowdown coinciding with a surge of fresh Lithium supply hitting the markets. Chinese battery makers have been able to sell their inventory at lower prices but will soon have to stop. However, with new emissions regulations coming into effect in China from July 1, 2023, NEV sales are expected to rise.

Also, strong demand in the USA due to IRA incentives and Europe's adoption of EVs indicate that H2, 2023 should see a robust recovery in global EV sales and, consequently, Lithium prices. This prediction assumes that there will be no severe global recession by that time.

As we gaze into the remainder of this decade, it appears that the supply of Lithium will be the key factor hindering the Electric Vehicle (EV) revolution. As a result, companies involved in high-quality Lithium mining are poised for long-term success. However, it's important to keep in mind that price fluctuations--both high and low--are par for the course in the volatile mining industry, even during a prolonged period of high demand for Lithium.