Lithium a Supply Chain View

Morgan Stanley analysts: Amy Gower, European Commodity Strategist, Adam Jonas, Global Autos & Shared Mobility Analyst and Morgan Stanley’s Head of China Energy and Chemical Research and Rahul Anand, Head of Material Research Australia discussed the very real and present electric vehicle (EV) recession, as well as the vast difference in quality and technological advancements of EVs at Morgan Stanley’s 6^th Australia Summit. 

Lithium supply has been relatively tight so far this year due to weaker spodumene shipments from Australia and environmental inspections in China. Adam Jonas believes that globally we’re in an EV recession, particularly in the US where EV penetration stalled at 7.5%. Comparatively during COVID EV prices were increasing every day with panic buying of these vehicles ensuing. There was a shortage of vehicles globally and demand was greater than supply for a year or so over this time. There were also large rental car fleets going on large shopping sprees which added to this demand.  

The market was penetrated at 25% in California and 40% in San Francisco, numbers which were significantly higher than the China national average for pure EVs. However, today there has been a trend towards decreased incremental buyer demand as evidenced through a residual value collapse in as well as a more prevalent perception that EV’s performance has failed to deliver on what was promised. 

Internal combustion is a real risk with insurance companies seeming to avoid EVs also, while there’s a lot at play on the regulatory side. Adam believes we’re in the ‘middle innings’ of the EV recession and it will likely get worse before it gets better. In this environment however, Adam notes, that hybrids and plug in hybrids should perform well. 

Jack Lu indicates that the Chinese battery inventory is still very high and sits around four months of consumption, which looks like it will likely turn stale as the utilisation rate is sitting very low at only around 30-40%. Last year, China implemented a low price strategy to gain market share, however the EV battery remains a very personalised product and many companies are not currently prioritising spending on R&D. If they continue to not do so, the auto original equipment manufacturer (OEM) will fail to set up the deep partnerships they are seeking which would in the longer-term lower the EV price. Most of the inventory remains with the tier two battery makers and, should demand continue at current rates, may result in the need for these makers to write off their excess inventory.  

Unutilised batteries will likely be recycled so lithium and other materials can be reintroduced into the supply chain. Some batteries will be used in low energy storage system (ESS) products where the integrators or companies are less concerned about the battery quality, as they will continue to be able to purchase them at a low cost. Some will be consumed in the two wheelers market and other electrification applications also. Overall, however 90% of the metals from these batteries can potentially be recycled. 

After the fall of the lithium price last year, the lithium outlook turned to a neutral or balanced view due to a smaller surplus. This will potentially increase slightly this year, with a few very small green shoots, providing a bit of support for lithium. Lithium prices have recovered somewhat since the start of the year on a tightening balance, with robust cathode demand and supply disruptions contributing. In lithium we did start to see a supply response to the big pull back we saw in prices. In Australia we have seen reducing production rates and we also had the impacts of the seasonal environmental inspection in China. 

Notably globally, Chile is reaching record highs in terms of supply. Chile's lithium exports reached a record high of ~29kt in April, rising 36% month on month and 83% year on year.  Africa, particularly in Zimbabwe, have seen their wet season shipments starting to pick up as well and Greenbushes in Australia have seen an increase in shipments back into China. A number of these sources of supply should be improving from here, including Australia, China, Chile, Africa. Demand from China's new energy vehicle (NEV) market remains robust, driven by hybrids and supportive trade-in schemes, lithium intensity is falling as hybrids gain share, while the rest of the world’s EV market remains a drag. Furthermore, the geopolitical landscape, marked by US tariffs on Chinese EVs and batteries and the potential of the EU following suit, could bring further risks.

China this year is seeing a quick recovery post the environmental inspections and seasonality of the brines improving as well. Environmental inspections at lepidolite mines in China drove some optimism in the lithium market, with a third of China's lepidolite production suspended at one point, boosting import demand. However, similar to last year, the inspections only resulted in temporary disruptions and these restrictions are reportedly coming to an end. 

Rahul Anand indicated that the Australian market focuses on the DCF valuation a bit more than our offshore colleagues. Lithium prices are implied in perpetuity that are at least 10-15% higher than spot pricing. The lithium spot price is still inflated especially as supply ramps up. In Australia, on the mining front there is still a lot of potential supply that could come onto the market to feed the market if required. 

Ultimately Australia is slowly rebounding. China’s imports of Australian spodumene in Q1 2024 declined 21% year on year, driven by a 34% quarter on quarter decline in Greenbushes' shipments due to inventory overhang. However, recent supply deals should look to resolve this, allowing Greenbushes to return to produce at full capacity for the rest of 2024. As spodumene inventories remain high and output stabilises, the spodumene tightness should ease for this year and we would expect to see shipments rebounding, which is already showing up in higher imports.

The lithium penetration rates vary globally; China is sitting around 30%, Europe 20%, US about 8%, indicating that the US is lagging in terms of penetration. The EV downturn has been notable and sooner than anticipated by the market. Big players in the EV market have been seen exiting the market or substantially diversifying away from the EV industry. 

In terms of Porter’s Five Forces, the auto industry is not well placed, due to massive excess capacity and unionisation. It is difficult for large US based EV producers to justify bringing in a cheaper EV model when China can bring in one up to US$5,000-$10,000 cheaper which feels like a luxury vehicle and can be launched one or two years earlier. China is also experiencing pure Battery Electric Vehicles (BEV) stagnation which sets the precedent in Europe and China. 

We’re entering a period of sharp national protectionism in the US, which seems to be politically motivated and related to the elections. This period of protectionism will likely persist for a couple of years and then you’ll likely see more horse trading. Adam believes you’re unlikely to get significant EV uptake without China. Ex-China market may be able to slow China down for a year or two however, to remain competitive, Europe and US will need to work with China, with appropriate safeguards in place around data and technology transfer.