By Yi Zhu and Anthony Cham Fung Yau, Bloomberg Intelligence
Signing long-term supply contracts with downstream users at set prices will help hedge against the price declines and keep revenue stable. Applying new technology in the extraction process will save production time and reduce unit costs, cushioning price falls and reserving margins. The lithium carbonate price has corrected 40% as of end-April from a peak at the end of October 2017, after jumping threefold since the beginning of 2015.
Major lithium producers such as Albemarle, SQM, Tianqi Lithium, Ganfeng Lithium and Livent are all vying for a bigger market share by acquiring lithium mine assets, developing new extraction methods and engaging in long-term offtake agreements with downstream customers.
Lithium producers lock in long-term supply to stabilize revenue
Lithium producers with rising output including Ganfeng Lithium are seeking long-term supply contracts with downstream clients to ensure stable demand, and setting periodic contract prices to hedge against short-term volatility. Boosting sales volume has helped counter falling prices since last year, stabilizing revenue.
Growing sales volumes to cushion price falls
Lithium producers are likely to increase sales volumes amid falling prices to keep revenue stable. With rising supply pressuring prices, signing long-term contracts with downstream users could help producers maintain or increase market share, boosting sales volume. Downstream users, in turn, would prefer a secure supply of raw materials, which are in strong demand due to the booming battery industry.
Major lithium users have signed long-term agreements for raw materials, such as LG Chem's five-year contracts with Nemaska Lithium and Ganfeng Lithium, and Posco's life-of-mine agreement with Pilbara Minerals.
Ganfeng likely to hunt more offtake agreements
Ganfeng Lithium will likely continue to seek more long-term sales contracts with downstream clients as it ramps up production, with output jumping 114% in the past four years. It has signed long-term supply contracts with major battery producer LG Chem and automakers such as Tesla, BMW and Volkswagen. Ganfeng produced 42,298 tons of LCE (lithium carbonate equivalent) in 2018, up 16% from a year earlier. As its joint venture with Pilbara Minerals ramps up at Pilgangoora, Western Australia, which was commissioned in 2H18, Ganfeng's output will continue to climb, allowing it to sign new contracts with more clients.
Ganfeng is the second-largest lithium producer in China in terms of revenue, following Tianqi Lithium. The company signed a 10-year contract in early April with Volkswagen to supply lithium products.
Lithium all about volume amid price fall
It will be a volume game for lithium producers going forward, as the metal's price weakness will likely continue. Revenue of lithium producers that fail to ramp up production could be hurt, as lithium prices have corrected since early 2018 due to rising industry supply. Booming demand from the battery industry drove up lithium prices in 2015-17. That spurred lithium miners to quickly increase output through commissioning new mines or expanding brownfield production. Lithium output will continue to rise in 2019 as new capacity comes online, pressuring prices. Producers with flat output growth will lose market share and see revenue fall.
Average prices of lithium carbonate and hydroxide fell 35% and 23%, respectively, in 1Q from a year earlier.
Tianqi, Ganfeng can gain lithium share with new technologies
Chinese lithium producers such as Tianqi and Ganfeng can gain market share by buying extraction technologies to reduce unit costs. New methods to extract lithium ore shortens the processing time from brine to concentrate and increase efficiency. Posco's technology can reduce production time by 12 times.
New technology may shake up global market
New extraction technology, if applied by Chinese lithium producers, could boost output and shake up the global market. China's major lithium producers Tianqi Lithium and Ganfeng Lithium only manufacture lithium vs. global peers such as Albemarle and SQM which are chemical producers and are more aggressive using new technology to increase output and reduce costs due to their 100% exposure to a single metal.
Assuming Chinese players increase their output by 3 times by purchasing technical know-how from third-parties such as Posco, they could lift their global market share to 43%, from the current 20%.
Posco's PosLX technology could cut production time to between 8 hours and 1 month from 12-18 months. Rincon's Direct Xtraction Process technology can process lithium carbonate within 24 hours.
Advanced technology owners gain market share
The most-efficient lithium producers, who can process brine to concentrate fastest, can increase production volume and reduce unit costs, preserving margin amid falling lithium prices. Extraction technologies such as Posco Lithium Extraction (PosLX) developed by the Korea's largest steelmaker would shorten processing time significantly, by 12 times. Producers with advanced technology can gain market share, and ensure operating stability vs. miners who rely on third-party technical expertise.
Posco is an integrated lithium producer from mining to battery cathode manufacturing. It owns brine pools in Argentina and has signed offtake purchase agreements with Australian lithium miners.
