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Lithium Price Plateaus as EV Sales in China Take a Dip
Lithium Price Plateaus as EV Sales in China Take a Dip

Lithium Price Plateaus as EV Sales in China Take a Dip

  • 20-Jan-2023 12:25 PM
  • Journalist: Bob Duffler

China: Companies in the electric vehicle (EV) supply chain in China, from miners to battery-makers and car companies, have seen an uptick in EV sales. The result has been an increase in the price of lithium, a key component of most electric car batteries, and the influx of billions of dollars from investors. However, industry insiders predict that this wave of demand is waning, leading to an oversupply, and decreasing prices for the metal.

The spot price of lithium carbonate rose rapidly over a two-year period, peaking at around 600,000 yuan ($85,530) per ton in November. This was nearly twelve times the price of lithium at the beginning of 2021 due to an imbalance between demand and supply, resulting in substantial profits for miners.

But the price of lithium has seen a sharp decline recently, dropping from its peak two months ago of 600,000 yuan per ton to 480,500 yuan on Jan. 16 - a decrease of 20%. Insiders attribute this to the fact that the price had become too high. Furthermore, an increasing supply in combination with forecasts for declining EV and battery demand are expected to push prices further downward.

Lithium is a key ingredient in the batteries used most by electric and hybrid vehicles. The metal has often been hard to source, due to its irregularly distributed small deposits across the earth's crust. Extracting it can be inefficient and harmful to the environment as well. Moreover, it takes a long period of time (up to three years) for mines to be properly established before they can be utilized.

Setting up a production line for EV batteries can typically be completed in just 12 months - however, miners were unable to produce enough of the raw material required to meet the surge of downstream demand.

This delay allowed leading Chinese miners such as Tianqi Lithium Co. Ltd. and Ganfeng Lithium Co. Ltd. to make lucrative profits from their existing operations. The two companies saw their net profit attributable to shareholders skyrocket 29- and five-fold respectively in the first three quarters of 2022.

Over the past year, dozens of Chinese companies have scrambled to try and get a piece of the thriving market by investing in lithium projects at home and abroad. In addition to traditional miners such as Tianqi and Ganfeng, battery and EV manufacturers also ramped up their investments in mining operations to ensure their own supply chains.

In 2022, Tianqi Lithium had attained an annual production capacity of 1.6 million tons of lithium concentrate ? the raw form of the metal derived from rocks or brine ? through its mines and factories in China and overseas, as per a note provided by financial services provider First Shanghai Group.

Last week, Tianqi announced its acquisition of Australian miner Essential Metals Ltd. for 632 million yuan, granting it access to a mineral reserve of an estimated 11.2 million tons.

In May, the world's largest Lithium battery-maker Contemporary Amperex Technology Co. Ltd., GCL Energy Technology Co. Ltd. and miner Chengxin Lithium Group Co. Ltd. fought for the majority stake of an insolvent Lithium mine located in Sichuan province during an auction ? with the hammer price of 2 billion yuan being 596 times greater than the opening price.

Contemporary Amperex Technology Ltd., otherwise known as CATL ? the world's largest EV battery maker ? ultimately acquired the mine for 6.4 billion yuan, according to an announcement made on Tuesday.

Despite having no relationship to the Lithium industry, several businesses have invested in mines and battery-making. In November alone, four notable investments made by outside companies were recorded.

Shenyang Cuihua Gold and Silver Jewelry Co. Ltd., a jewelry-maker, recently purchased a majority stake (51%) in a Lithium mine located in Sichuan province, at the cost of 612 million yuan. The investment was made with the purpose of diversifying the company's business and increasing its competitiveness. Similarly, Shenzhen Shengxunda Technology Co. Ltd., a tech company, invested 155 million yuan into another Lithium mine located in Henan province; an investment that drove up the price of their shares.

Sundy Land Investment Co. Ltd., a property developer, announced their plan to participate in a group investment in an Argentine Lithium mine in March. This caused their share price to double from $45 within two weeks. During this period, some of the company's staff, including executives, sold their shares for 220 million yuan; resulting in them earning a 71.8% profit. For failing to disclose these transactions promptly, the Shanghai Stock Exchange publicly denounced Chairman Yu Jianwu.

Sundy Land's stock experienced a dramatic decline following their announcement of involvement in the Lithium project. By January 17th, 2021, it had dropped to 2.88 yuan, a decrease of 60% from its peak of 7.22 yuan on March 22nd. The project has yet to show any progress and investors are wary of further decreases in share price.

Battery and electric vehicle (EV) manufacturers have struggled with the increasing cost of Lithium, uneager to raise prices for fear of losing market share. Despite a growing EV market in China last year, XPeng Inc. and Nio Inc., two Nasdaq-listed companies, reported net losses of 6.8 billion yuan and 8.7 billion yuan respectively.

Funding upstream is expected to increase, allowing the supply of Lithium to meet demand by 2023. Global supply could grow by 370,000 tons to 1.1 million tons of Lithium Carbonate this year. Of that new supply, 120,000 tons would be sourced from mines owned by Tianqi Lithium and Ganfeng Lithium in Australia, with 80,000 tons coming from China. Estimates suggest there could be an oversupply of Lithium as early as 2021.

A potential oversupply of Lithium is predicted for the second half of 2023, as 65% of this year's new supply will be released from June to December.

In November, Liu Jincheng, chairman of China's sixth-largest battery-maker, Eve Energy Co. Ltd., cautioned about the oncoming surplus supply of both batteries and their raw materials that year.

Slower electric vehicle (EV) sales growth is anticipated to reduce demand for Lithium as supply expands. This is likely due to the Chinese government stopping its subsidies and tax breaks for EV and hybrid buyers at the end of 2022, which had helped spur an increase of purchases in 2021 to boost economic recovery and advance the green energy transition.

To soften the impact of vehicle price hikes, China has extended its exemption on the 10% purchase tax until the end of 2023. Numerous Chinese carmakers have begun raising prices to compensate for the elimination of subsidies and higher raw material costs. BYD Co. Ltd., China's largest EV maker, announced that their new cars will be priced 2,000 yuan to 6,000-yuan higher effective Jan. 1, depending on the model. Most other carmakers have also followed suit.

Market analysts anticipate that EV and hybrid vehicle sales will continue to rise, albeit more gradually than in 2021. It is estimated that between 7.5 million to 9.4 million units will be sold in 2023, exhibiting a year-on-year increase of 12% to 40%. In contrast, there was a 95.6% surge in such sales in 2022, reaching 6.9 million units.

The discrepancy between Lithium supply and demand has already influenced the share prices of miners; Tianqi Lithium and Ganfeng Lithium have seen drops of 41% and 34%, respectively.

Despite the current market difficulties, carmakers could benefit from falling Lithium and battery prices. It is expected that the raw material price will reach a comfortable level of 450,000 yuan per ton for battery and battery component makers this year.

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