ANALYSIS: Wave of consolidation in lithium supply chain will continue

Tianqi’s recent purchase of a stake in SQM is the latest in a series of deals showing how participants at different stages of the supply chain are opting to strengthen their position through vertical partnerships. Meanwhile, consumers are keen to lock in feedstock supply through offtake agreements.

The global lithium industry is growing rapidly, but at the same time competition is consolidating, with horizontal partnerships being formed between producers and integrating with the vertical partnerships being agreed between upstream miners and downstream original equipment manufacturers (OEMs). This is all happening as the industry jockeys for position in the “electrification of energy” race.

Given the size of the lithium market today and where it needs to be in a few years, we expect a lot more of the same – more offtake agreements, joint ventures, partnerships and mergers and acquisitions.

Producers will need help with finance and know-how, while downstream manufacturers - from lithium processors, cathode material manufacturers, battery manufacturers to OEMs - will want to form partnerships to secure their supply lines and volumes.

Upstream mines to be consolidated by equity cooperation
The largest share-buying deal in the lithium industry so far this year was China-based Tianqi Lithium’s purchase of a 23.77% stake in Chilean producer Sociedad Quimica y Minera (SQM) for $4.066 billion. The fact that Tianqi is already a large producer shows its confidence in the outlook for lithium.

Tianqi and SQM are both top-tier producers. Tianqi will have a lithium carbonate equivalent (LCE) processing capacity of 100,000 tonnes per year by 2020, with two projects underway – a 48,000-tpy lithium hydroxide plant in Australia and a 20,000-tpy lithium carbonate plant in China’s Sichuan province.

As well as acquiring its stake in SQM, Tianqi’s main raw material feed comes from its 51% stake in Australia’s Greenbushes project, which it owns jointly with Albemarle Corp – one of the world’s largest lithium producers.

SQM also plans to expand its LCE production to 180,000 tpy by 2021 from its current production of 48,000 tpy.

As the lithium market expands, it is interesting to note that the big producers want to remain the big producers – and the easiest and quickest way to do that is to buy existing capacity or partner up with somebody who already has some, rather than start a greenfield project.

Other notable deals include Chinese producer Ganfeng Lithium’s acquisition of a 37.5% stake in Minera Exar from SQM in November. Minera Exar is the holding company for the Cauchari-Olaroz joint venture, a brine project in Argentina that Lithium Americans has a 62.5% interest in – this is up from 50% when SQM was the joint-venture partner.

Ganfeng also has a stake in the Australian Mt Marion mine; the Chinese producer bought a 43.1% holding of the mine in 2015. Spodumene from Mt Marion has supplied Ganfeng’s smelters in China since 2017.

Tianqi and Ganfeng have also invested in the upstream supply chain, having initially been processors, they have both invested in hard rock mines and now in brine operations. What is interesting is that the two lithium production steams, brine and hard rock, both want to diversify.

In November, another two lithium miners, one senior and one junior, although both large, announced their wish to form a joint venture.

Albemarle announced an exclusivity agreement with Australian miner Mineral Resources to potentially form a 50:50 joint venture to operate the Wodgina hard rock mine in the Pilbara region of Western Australia to produce spodumene and lithium hydroxide, with Albemarle set to provide the technology to produce hydroxide.

The Wodgina joint venture is expected to produce 750,000 tpy of 6% spodumene, which will ultimately be used in the production of 100,000 tpy of lithium hydroxide. They plan to build this latter capacity in two phases of 50,000 tpy each.

While United States-based electric vehicle (EV) manufacturer Tesla uses nickel-cobalt-aluminium (NCA) battery chemistries, other manufacturers have tended to opt for nickel-cobalt-manganese (NCM) chemistries and their target is for NMC 811 (nickel, cobalt and manganese at a ratio of 8:1:1).

These high-nickel chemistries prefer to use lithium hydroxide rather than lithium carbonate. As such, the current and next wave of investment seems to be focused on producing more lithium hydroxide and it is easier to produce lithium hydroxide form hard rock than carbonate.

This is probably why Albemarle has invested further in hard rock. The spodumene it gets from its existing 49% ownership of the Greenbushes project supplies its Jiangxi Jiangli plant in China. It will now have additional spodumene from which to produce more hydroxide.

In addition to the above partnerships, SQM has a joint venture with Australia’s Kidman Resources and Tesla has an offtake agreement with Kidman. Ruifu Lithium and Yahua Lithium, both based in China, have invested in Core Exploration, which owns the Finniss lithium project in Australia. Korean major Posco acquired the northern portion of Sal de Vida project in South America from Australian Securities Exchange-listed Galaxy Lithium, while also signing a long-term offtake deal with Australia’s Pilbara Minerals.

The surge in new production from Australia in 2018 has created more competition, which is expected to challenge some of the old ways of the industry, especially in terms of how lithium is priced. That said, with some of the traditional South American producers now upping their interest in new producers, it suggests they do not want to lose too much control of the industry.

We think there will be further deals, especially while lower lithium prices make it more difficult for junior miners to raise finance. Strong links are being established between the old and the new producers, which Fastmarkets thinks is a healthy development: on the one hand, it should help new producers with finance, while on the other hand, it should mean there is more coordination in matching supply with demand, to lessen boom/bust cycles and facilitate a smoother transition from small to large market.

Consumers locking in feedstock supply via offtake agreements
Lithium salts producers that do not have mines have tried to ensure feedstock availability in the future. OEMs have also signed more offtake agreements with salts producers to ensure their future supply.

Ganfeng Lithium signed offtake agreements with four consumers, two battery producers - LG Chem and Panasonic - and two EV manufacturers in Tesla and BMW, which should account for most of Ganfeng’s output in 2019-2025.

Tesla and Japanese trading house Mitsui have agreed to buy output from Kidman Resources, a junior mining company that is not in production yet and more accurately has not yet even made the final decision to go into production. This suggests downstream buyers are still keen to secure supply and implies they are not worried about whether there will be adequate demand down the road. Instead, they are worried about whether there will be enough supply.

Fastmarkets forecasts the lithium market will be in surplus until 2022-2023. We think the price sell-off that started in late 2017 has been largely front-loaded, in that a lot of the price weakness has already been seen. While we expect there is still some limited room on the downside for prices, we think prices will start to flatten out toward the end of 2019 and then remain rangebound until the market starts to move back into a supply deficit again. But given the strong compound average growth rates (CAGR) that we expect in the EV and energy storage systems (ESS) industries, once demand has climbed to absorb this current supply response, we expect the market will return to a deficit.

In addition, while lithium production has been able to keep up with high CAGR on a small base of demand, when that demand gets bigger persistently high CAGR will likely cause producers to struggle to raise output in a timely fashion. As such, Fastmarkets sees investment in the supply chain as a collective responsibility to ensure the smooth transition into the EV era.

Lithium offtake agreements

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William Adams

william.adams@metalbulletin.com

Vicky Zhao

vicky.zhao@fastmarkets.com

Published

William Adams

Vicky Zhao

December 14, 2018

10:55 GMT

London, Beijing