Lithium Market Faces Uncertainty Amid China’s Expansion and Global Supply Dynamics

As China accelerates the development of its battery supply chain, the global lithium market is encountering a precarious situation with potential opportunities for price recovery, despite recent lows. Speaking at the Diggers and Dealers Mining Forum in Kalgoorlie, Australia, on August 7, Ken Brinsden, CEO and President of Patriot Battery Metals Inc., expressed optimism about a future rise in lithium prices, despite the metal hitting a multiyear low in July.

China's efforts to boost domestic lithium production and reduce dependency on imports are facing significant challenges. According to Alice Yu, a senior analyst at S&P Global Commodity Insights, China is trying to expand local lithium raw material production amidst increasing obstacles to overseas investments by Chinese companies. However, these efforts may fall short of meeting the rapidly growing demand.

Brinsden pointed out that China’s expansion is primarily focused on the less competitive end of the cost curve, which could lead to higher lithium prices in the long term. "What [China is] actually doing is building out the right-hand side of the cost curve, and you could reasonably expect higher lithium prices in the longer run because of [this]," Brinsden remarked during the forum.

Shunyu Yao, another analyst at S&P Global Commodity Insights, highlighted that while China’s costs are currently managed, the country’s expansion potential is limited due to poor resource endowments. S&P Global Market Intelligence data indicates that China and Zimbabwe, a key supplier to China, have higher cash operating costs for spodumene compared to Australia.

China's lithium production is further hampered by seasonal production constraints, particularly in Sichuan’s plateau area, where winter maintenance can reduce actual production time. Moreover, the high magnesium-to-lithium ratio in Qinghai province’s salt lakes has historically increased production costs, though recent technological advancements have somewhat mitigated this issue.

Despite efforts to increase production, China’s domestic lithium raw material supply is projected to meet only 36% of the demand in the electric vehicle sector by 2028, even as supply is expected to more than double to nearly 319,000 metric tons of lithium carbonate equivalent (LCE) from 153,000 metric tons in 2023.

Brinsden predicts that the vulnerabilities in China’s supply, combined with the rapid expansion of battery supply chains, could trigger a price rally before 2028. S&P Global Commodity Insights has forecasted an 8,000-metric-ton deficit in lithium chemicals by 2028, suggesting that current surpluses may soon flip to a shortfall.

At the Kalgoorlie forum, Brinsden also cited Bloomberg NEF estimates showing that lithium-iron-phosphate cell sale prices in China have halved over the past year, significantly expanding the addressable market for lithium-ion batteries.

China’s production of lepidolite, a lithium ore, is more costly due to lower grades compared to Western Australia. However, these disadvantages are partially offset by lower operational costs in China, including shipping, labor, and power. Reg Spencer, a mining analyst at Canaccord, noted that China’s cost issues could be resolved over time, especially if the mines are integrated into the battery supply chain, reducing overall production costs.

Spencer also suggested that what were previously seen as deficit markets supporting higher prices may now be shifting towards more balanced conditions and lower pricing, at least until 2028, when a small deficit is anticipated.