Lithium is one of the “green” metals along with copper, nickel and cobalt, a leader in the global electrification of transport. The global lithium supply was unprepared for the dramatic ramp-up in electric vehicle production in China and the EU, which led to record increases in the price of lithium carbonate and lithium hydroxide. We believe the lithium market balance will soon turn into a deficit and keep the price of the material near local highs. Commodity producers, notably Livent (NYSE: LTHM), will benefit from it.
The main lithium reserves are located in South America
Lithium is mined from two sources: lithium brine (salt lakes with low lithium content) and lithium pegmatite (solid ore).
Source: Interpretation by Invest Heroes
Most lithium recovery from brine is concentrated in the region of the “Lithium Triangle” – Argentina, Chile and Bolivia. Additionally, China has also recently made a leap forward in the recovery of lithium from salt lakes. The development of lithium pegmatites is still carried out mainly in Australia. The United States is not wealthy in terms of lithium recovery.
Meanwhile, the main suppliers of raw materials for production (lithium carbonate and lithium hydroxide) are Australia, Chile, China and Argentina.
About 60% of the world’s lithium reserves are located in areas bounded by intergranular brines of dried (alkaline) sodium lakes (salars). Chile leads in terms of reserves and South America accounts for more than half of the world’s resources.
Lithium is not just about green energy
Due to the strong electrification of transport in China and the production of lithium-ion batteries in South Korea and Japan, Asia is the main consumer of the raw materials produced. However, the by-products of lithium mining are not only used for the production of lithium-ion batteries, but also in “traditional industry”.
Source: S&P Global
A shortage is likely to occur in the near future
According to research firm Argus, lithium carbonate prices reached $62,500 per metric ton on March 29, while the price of lithium hydroxide topped $67,000 per ton.
The continued strong increase in lithium carbonate and lithium hydroxide prices in early 2022, which followed an earlier peak in September and October 2021, was driven by rising electric vehicle sales in China and Europe . Sales of new energy vehicles in China and the EU have increased to account for 10% of total global sales of new energy cars, representing a bullish scenario for EV penetration.
As the adaptation to electric vehicles accelerates sharply, the demand for batteries will also increase, which will generate more than 5 times the demand for lithium as early as 2030 compared to 2021.
Source: Green Car Congress, BNEF
After analyzing different sources (some of them 1 and 2), we believe that due to the current limited introduction of new lithium hydroxide and lithium carbonate production capacities (for example, it takes up to ‘to 12 to 24 months to extract lithium salts from lithium brine), there will be a shortage of materials in the short term (2022-2023). However, additional capacity will be commissioned later in the lithium triangle (Argentina, Chile and Bolivia) as the development of intercrystalline brine sites will begin after 2023. Livent, for example, will launch additional production capacity of carbonate lithium in Argentina by the end of 2023. , increasing this capacity to 60,000 tons by 2025.
The lithium market could reach a surplus before 2024
However, the lithium market could become surplus before the end of 2024 if the excess demand disappears. This could happen as the prices of the main materials used in the production of batteries – nickel, copper, cobalt and lithium in the class of batteries composed of lithium, nickel, cobalt and manganese (NCM) and lithium, iron and phosphate (LFP) ) – have increased significantly in 2021 amid strong demand and due to fears in early 2022 that the shortage of raw materials could worsen due to the increasing number of conflicts in the world. The increase in production costs will certainly pass on to the consumer, reducing the demand for cars and, therefore, for metals.
Manufacturers of electric vehicles are already raising prices. For example, Tesla in March raised the prices of some cars by 5-10%, as did Li Auto. To compound the effect of rising prices, some governments are getting rid of subsidies for EV purchases. For example, China will reduce subsidies by 30% by the end of 2022, as the target of new energy car sales accounting for 20% of total car sales was met 3 years ahead of schedule.
Our leader among all lithium producers is Livent. Livent produces lithium carbonate and lithium hydroxide, from which a large number of lithium compounds are extracted. In addition to its own production, Livent resells raw materials to third parties and obtains lithium compounds from brines. This method is one of the most profitable. Livent’s lithium production cost is one of the lowest in the industry.
Livent will benefit from high lithium prices in the short term, as it will soon bring its new deposits into service. The company plans to increase its lithium carbonate production by 100% to 40,000 tpa by the end of 2023 following the planned commissioning of the plant in Argentina in 2023, and to 60,000 tpa from 2025.
Source: Company Data
Additionally, by the end of the third quarter of 2022, Livent will increase its lithium hydroxide production to 30,000 tonnes per year through its Bessemer City facility.
Source: Company Data
Due to high lithium contract prices, the company’s 2022 EBITDA will increase 267% year-on-year to $181 million.
Factors that will influence the rise in value of securities over the next 12 months:
- Selling prices of lithium hydroxide and lithium carbonate still high due to global shortage of raw materials;
- Increased operating performance.
We estimate the fair value of Livent shares at $32.3 per share. BUY note.
- Faster exit from the surplus lithium market due to lower demand for new energy vehicles;
- Acceleration of supply growth thanks to the commissioning of deposits in the “lithium triangle” region.
We are confident that with the rapid adoption of electric vehicles in China, the United States and Europe, the world will face a new era of lithium rush that can overcome the gold rush due to extreme shortages. of lithium carbonate and lithium hydroxide in the years to come. Additionally, we are seeing lithium producers begin to revalue long-term contracts at greater than expected rates due to extreme spot price increases. Lithium producers will benefit from the trend, they are already commissioning new capacities and we believe that Livent is the clear winner.