Soaring Surges To Brutal Reversals: What Lies Ahead For Lithium Prices?

Original Post

By Stuart Burns

A recent Reuters post detailed how a super-charged two-year rally, which saw Chinese spot lithium carbonate prices rise by tenfold, went into brutal reverse over the first part of this year. Indeed, the lithium spot price slumped by 70% between November and its low point in April.

The move leaves many analysts asking: what does the future hold for lithium prices? A large part of lithium’s surge was the rapid rise in demand from the EV market, confronting a tight supply market. This was both perceived to be inevitable and was also encouraged by legislation.

However, the market tightness did not stem from the fact that the metal is rare. Instead, it was because commercial exploration of reserves takes time. Moreover, it often occurs in parts of the world without the ready infrastructure to quickly ramp up production.

But when sales of new EVs slowed in China late last year, and early this year, the lithium market took a tumble. Moreover, reports of an overstocked supply chain added to the overwhelming sense that the bubble had burst.

Lithium Prices Have Bullish Potential

But in truth, the market fundamentals remain robust. Worldwide, new legislation continues to push for the adoption of EVs and the rollout of charging infrastructure. Though the market is not quite fast enough for this writer to make the switch, the direction of travel is quite clear. It’s just the time frame that remains open to debate. Furthermore, it’s that time frame that will determine lithium’s recovery.

At the time of this writing, prices have already started to recover. Indeed, MetalMiner’s reporting service indicates that spot prices are up over 10% from last month in China. Moreover, prices rose again in May despite new supply expected to come on stream in the year ahead.

Demand is undoubtedly getting a boost from a robust Chinese EV production recovery and reports that supply chain destocking is coming to an end. Meanwhile, producers outside of China are more protected from the spot market, with longer-term agreements insulating them from the various peaks and troughs. Also, producers continue to see significantly higher contract prices this year than a year ago.

While the CME’s lithium contract got off to a slow start, it is now gaining traction. Moreover, it should eventually achieve sufficient liquidity to provide a hedging opportunity. This will protect the producers, consumers, and the growing trading market in lithium products from the wilder extremes of the Chinese spot price.

In the meantime, stories of the lithium prices' demise have been greatly exaggerated. Sure, the spot and in-time contract prices will see some volatility this year. However, a resumption of the bull market remains in the cards.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.