Near Yellow Mountain

Monday, November 2, 2015

The Lithium Market - What's Next?

This post is a departure from the norm since it is work related and was first posted on my Linked In page. So with "full disclosure" you can either read on or move to another blog post.

I have spent the majority of my career in the lithium business. Twenty years ago if someone asked me what business I was in and I said “lithium” – it usually generated a quizzical look and a shrug or a question about bi-polar disorder. In 1995, lithium certainly wasn’t mainstream. Today it is easy for people to relate to lithium since it powers IPhones, tablets, and Tesla. Although the average person in 2015 is familiar with lithium, 99.999% of the people on the planet can’t name a lithium company nor do they care where the lightest metal comes from.
On the other hand, the .001% of the population who knows or cares about lithium, generally speaking, has limited access to meaningful information about the main players or their competitive positions and future prospects.
Consumers of lithium chemicals have long complained about the “secret club” they imagine controls lithium supply from proverbial “smoke filled rooms”. The major lithium suppliers which until recently were called the “Big 3” clearly did not work together effectively to control price for most of the past fifteen years. In my opinion their arrogance and short sightedness often caused them to sub optimize their obvious market power.
The predictions of a green energy driven “lithium boom” almost a decade ago led to dozens of projects that resulted in well over 1 billion (US) dollars of investment in completely failed or minimally productive assets around the world. The failed lithium projects (think: Canada Lithium, Qinghai, Tibet Zabuye, Galaxy,etc) as well as projects that lingered but never got adequate financing to produce (think: Nemaska, Western Lithium, LAC, Simbol, etc) in addition to botched expansions of existing resources like FMC’s left the industry in a situation where there is currently insufficient capacity to support the now nascent lithium boom. The obvious result - price is moving up.
Since the “lithium boom” did not occur when predicted and is now only in its infancy , the failed capacity additions are just beginning to be felt in the market. The industry is approaching a full blown shortage situation - especially since lithium is not necessarily a fungible commodity like gold or sweet crude oil. All lithium is not created equal even if it meets a similar chemical spec. If you don’t believe me, ask a cathode producer who looks at morphology and stability of impurity profiles not just assay. In total supply seems to stay in balance with demand to 2020 but mix issues will cause short term pain and higher prices. You are likely to see some major lithium consumers on future episodes of "Hoarders". Check your local listings...
So where do we go from here? Some of it you have heard before. Let’s take a quick look:
SQM – is the only member of the former “Big 3” with a clear strategy that is being executed. Despite a plethora of issues with the government and a down cycle for their core ag related businesses, SQM continues to be a major force in the lithium industry. SQM knows who they are and will continue to run a very profitable upstream lithium business while they sort out their long term issues. The run up in carbonate and hydroxide price will go straight to their bottom line.
Albemarle – what I have called the “lithium superpower” seems on the verge of turning their proverbial lithium “sword” into ploughshares. For non-native English speakers this simply means it looks like they are losing their strength by choice (or bad decisions). Yes, it is hard to understand especially after they have bet the future of the company on the Rockwood acquisition. Rockwood will continue to be very profitable short term but not profitable enough long term in my opinion to overcome the high acquisition cost and things like an expansion that will not produce significant volume until 2017 . The flawed hydroxide tolling strategy from high cost suppliers is designed to bridge ALB until their curious plan for a 50,000 MT LCE spodumene based plant is on-line. According to ALB's CEO, the new plant isn't likely to produce until the next decade. Time's wasting.
ALB is in the process of cutting loose most of Rockwood’s key management and technical talent developed over decades. That would be ok if they had a team to replace the departed talent in kind. They don't.
Good luck ALB as you appear to be transitioning from the Lithium Superpower to the “Roman Empire of the Lithium World”. 
The Chinese Power Players – Tianqi and Ganfeng: The Chinese market is the largest in the lithium world and these two companies are the leaders in the Middle Kingdom which make them defacto “majors”. Tianqi owns 51% of Talison which solidifies their position as a major factor in the global upstream market. Ganfeng is the world’s largest lithium metal producer, a major supplier in the Asia downstream lithium market and increasingly important as a global upstream player.
FMC Lithium – The sad story of a great franchise being decimated with each passing year by continual missteps. This is a “Frog Prince” tale with no one on the horizon to break the spell. FMC Lithium is now a stepchild that could potentially flourish with a supportive adoptive parent. FMC's 3rd Quarter earnings call on 10/29 continued to have the standard "happy talk" about the future of lithium while they delivered $1.8 million in earnings on $57 million in sales. Results speak louder than words. 
It is hard to function as a "noncore" business in a company whose stock has fallen from the mid-$80s to mid-$30s in the recent past.  FMC should sell but likely wants too much for a  damaged asset.
Orocobre – very late to market, over budget and with higher costs than anticipated yet the lithium world yearns for another brine based major. ORE could be the star of 2016 if they can produce more than 10,000 MT economically. No other lithium company has  had the opportunity ORE currently has - to enter the market at time when the capacity addition will not lower price. ORE - the biggest question mark in the lithium world.
Two of the companies listed above are looking to ORE for "third party" sourcing but why supply your neighbors when you can achieve a higher yield going directly to customers? 
Juniors – Western Lithium and LAC. The merger is still 2+2 = 3 in my opinion. Simbol – is the “better mousetrap” that will likely never be built. Projects in Argentina lack investment due to political chaos. Tesla’s two virtual suppliers (the names that shall not be named) on “contingent contract” are unlikely to produce. Et Tu Elon…..
In any case, Chinese suppliers will keep expanding and despite their high costs, lithium supply will be, for the most part, adequate to bridge the supply gap at much higher prices until lower cost capacity comes on-line early in the coming decade.
There is one project  I believe has excellent prospects to supply by 2018 but that is a story for another day.