We continue to believe investors should have exposure to lithium producers, with some of our past favourites being Allkem (ASX:AKE) and Pilbara Minerals (ASX:PLS). In this article we breakdown everything you need to know about the current lithium market.

Lithium Quickly Explained

lithium is difficult to process into battery chemicals. Put very simply, historically, most lithium has originated from brine or salt lakes in South America. The ore mined is converted into lithium carbonate or lithium hydroxide.

Lithium hydroxide can be higher value, but both are used to produce batteries. It’s the chemical that’s produced from the converters that goes into batteries.

As demand for lithium has grown, due to battery production, other sources of lithium are required. Enter hard rock mining, which also can have a shorter lead time to production. Much of this mining is occurring in Western Australia. The ore produced is processed into a concentrate called spodumene, which is low grade lithium, typically 6%, which is why it’s called spodumene concentrate (SC6). This in turn, needs to be processed into lithium carbonate or lithium hydroxide, or another type of intermediate product. This is then processed using converters into chemicals for batteries.

There is a trend in Australia for on-shore processing, being led by Wesfarmers (WES), Pilbara Minerals (PLS) and Liontown Resources (LTR). This moves production up the value chain

Lithium Prices

While lithium carbonate prices have been under pressure in the past few months (see graphic) ahead of the Chinese New Year (end of January to mid-February) prices of spodumene have held up. Pilbara Minerals (ASX:PLS) announced this year that price reviews completed with major offtake customers delivered higher prices.

In light of PLS, we expect that ongoing negotiation of spodumene offtake contracts will see prices continue to rise through the current quarter to 31 March. This in turn should pressure margins at the converters, which will result in rises in lithium battery grade chemical prices (carbonate and hydroxide). The only caveat, is the ending of subsidies in the sector and its impact on electric vehicle (EV) sales in China, which act to offset the above forces.

Limited Supply But Rising Demand

Industry sources* expect mined global lithium supply will increase by 42% in 2023 to 900k tonnes lithium carbonate equivalent (LCE), driven by increased mining in Australia and Chile. Supply needs to increase to 2.4m tonnes LCE to meet demand in 2030, which requires around US$42m (A$60m) of new lithium industry capital investment.

*Benchmark Mineral Intelligence

However, lithium supply growth remains limited in the short-term. Supply is not expected to catch up with demand until 2025. While there are some large projects in the pipeline, they all take time to commission and bring to full production. Converting the lithium units to battery grade lithium chemicals could take even longer.

Costs are Rising Pushing Project Economics Higher

Capital costs in the industry are rising due to inflation, as we have recently seen at Liontown Resources (ASX:LTR) which will drive up the lithium prices needed to justify projects (incentive prices).

The higher capital costs of some projects could cause some projects to be delayed or cancelled altogether, exacerbating the lithium supply shortage. The average time from discovery to production for a lithium project is typically 5-6 years

What's Happening in China?

China itself is adding to supply with investments of US$5.4bn in domestic lithium resources recently announced. However, its lithium lepidolite reserves are very low grade and high cost. China domestic mine production is forecast to rise by 69% in 2023 from 2022 levels.

For a more comprehensive breakdown of lithium:

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