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Lithium in 2018: Has the bubble burst?

Recent news reports have suggested that there is a crisis in financing the lithium mining industry coupled with a slump in the price of lithium and lithium stocks, both of which started to slide at the beginning of this year. 

So has the lithium bubble now burst?

Over the last couple of years, the press has been full of reports of the lithium boom and the hype centred around the explosion of the global electric vehicle (EV) industry powered by lithium-ion batteries; the green energy storage technology of choice for the industry.

Across the globe, so called ‘green cars’ benefit from subsidies, tax breaks and other perks, while combustion engines face mounting penalties including driving and parking restrictions. With this pressure to increase EV production, car manufacturers and others have risen to the challenge with a flood of electric cars due to hit the market in the next few years.  Concerns were initially expressed about how demand for metals such as lithium will be met from the handful of current suppliers (like Albemarle, Sociedad Química y Minera de Chiles (SQM) and Chinese producers Tianqi Lithium and Ganfeng Lithium).

Prices for lithium jumped by over 200 per cent in the last five years and the share prices of the core of lithium producers sky-rocketed in recent years.  But what has happened this year?  Has the bubble burst?

Analysts can't agree.  Some predict that the supply of lithium that will come on line from new projects and the increased production from existing providers such as SQM, Galaxy and Orocobre, will swamp the market causing the price for what is acknowledged to be a geologically abundant mineral, to crumble. Against this backdrop they are concerned that the predicted growth of the EV market is over-stated.

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The EV market is currently tiny amounting to only around two percent of new cars sold and commentators predict that this would need to grow to around thirty percent to off-set the surplus lithium supply.  This seems a tall order from today's levels.  This negative outlook can be evidenced by the falls in stock prices this year in these producers and the drop in the lithium price.  There is also anecdotal evidence that lithium projects have struggled to obtain funding from traditional mining financiers and instead have had to patch together funding from a range of more non‑traditional sources, for example, the SoftBank Group (usually a technology player) investment in Nemaska Lithium.

Other analysts are much more optimistic.  They believe the build-up in supply will be more gradual – recognising the time and investment needed to bring new lithium mines into production – coupled with the inevitable rise in EV demand.  They suggest that the modest drop in share prices this year should be viewed against the backdrop of the terrific growth already achieved.  The shortage of funding can also be explained by natural lender caution, given the small size of the current lithium market, the long-term investment required, some unproven technologies and the opaque nature of the lithium market (as lithium is currently not traded on any exchange).  However, the likely purchase by Tianqi Lithium of a 24% stake in SQM for over USD4billion suggests that it is too soon to call time on the lithium boom.

Only time will tell what the lithium industry will look like in five or even ten years and that's what makes it an exciting market to watch.

Rachel Speight is a Partner at Mayer Brown

 

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