SQM share prices dip amid fears of lithium market oversupply

By Martim Facada
Published: Thursday, 01 March 2018

The value of SQM’s shares went down by 13% in five days amid fears that the lithium market will be oversupplied by 2021.

Chilean lithium producer SQM’s share prices have gone down by 13% in less than a week to stand at $50.71 at the close of the market on Wednesday February 28, compared with $58.32 on February 23.

Investors’ fears of oversupply in the lithium market were triggered on February 26 with the release by investment bank Morgan Stanley of research suggesting that the price of lithium could fall by 45% by 2021 because of the planned expansion of lithium production in Chile by that year.

Consequently, SQM’s share value dropped despite the announcement by the company on Wednesday of solid results for 2017.

SQM’s earnings increased by 53.6% to $427.7 million for the full year of 2017, from $278.3 million in the full year of 2016.

The robust results achieved in 2017 were a result of strong lithium demand alongside the significantly higher prices achieved for lithium compounds throughout the year, chief executive officer Patricio de Solminihac said.

"We achieved the same sales volumes in our lithium and derivatives business in 2017 as in the previous year, but prices increased by 25%, with the average price rising to more than $13,500 per tonne in the fourth quarter [of 2017]," he added.

The prices for lithium carbonate, battery grade (min 99.5%), rose to $17.50-19.50* per kg on a cif China, Japan & South Korea basis, and to $15.50-18.50 per kg on a ddp Europe and US basis, on Thursday March 1. This compared with an average price of $7 per kg in March of 2016, according to Industrial Minerals market assessments.

The average spot price of China-origin lithium carbonate (Li2CO3), ex-works China, battery grade (min 99.5%), remained strong at 150,000 yuan ($23,705) per tonne*, according to Industrial Minerals’ assessment on February 22.

Under a new agreement with Chilean economic development agency Corfo, SQM is allowed to increase lithium compounds production to 216,000 tonnes per year by 2025, from 49,700 tonnes of lithium products in both 2017 and 2016.

Meanwhile, rival producer Albemarle could increase its lithium compounds production in Chile this year to as much as 125,000 tpy, from 44,000 tonnes of lithium products in 2017.

In SQM’s 2017 results, de Solminihac said that the company would "evaluate the timing for future expansions in the Salar de Atacama based on market conditions." He did not say that the new agreement with Corfo would lead directly to an increase in production toward the maximum agreed level.

With the current undersupply in the lithium market, where end-users such as carmakers Volkswagen and BMW have no purchasing power, different market experts and producers have told Industrial Minerals that the projected fall in prices by 2021 would be unlikely. And oversupply of lithium would be far from likely if we look only at current supply and demand for this battery material.

"There is a lot of potential supply planned by the different lithium producers and junior producers. However, when looking at the pace at which lithium production has come online in the past 10 years, and the current demand for lithium compounds in China, Japan and [South] Korea, I find it unlikely that the market [will be] oversupplied any time soon," a Chinese lithium producer told Industrial Minerals.

In 2017, Chinese producers of new energy vehicles (NEVs) reached total production of 794,000 units, an increase of 53.8% year-on-year, while sales went up by 53.3% to 777,000 units throughout the year, according to the China Association of Automobile Manufacturers (CAAM).

Bloomberg New Energy Finance expects to see the world’s battery capacity more than double by 2021 to 320 GWh per year, from 116 GWh at present. This will happen with support from Chinese subsidies to promoted the development of that country’s NEV industry, which it is hoped will produce 2 million vehicles by 2020.

Supported by strong rates of production and sales growth in China and Asia, demand for lithium compounds is expected to treble to nearly 600,000 tpy by 2026, against a forecast supply of 379,800 tpy by the same year, according to Industrial Minerals’ research document Global Lithium Market: Five Year Strategic Outlook.

"Even after the agreement between SQM and Corfo, it will take SQM considerable time to bring new production online. It will take several years and would take until 2020 before the new material reaches the market, if everything goes according to plan," William Adams, principal consultant at Metal Bulletin, told Industrial Minerals.

"Bringing online new lithium production has been systematically delayed in recent years," Adams added. "A lot of forecasts look at production capacity but producers, especially those ramping up new capacity, will struggle to produce as much as many expect… Greenfield production [projects] could take as long as 10 years before they start production."

The boom in demand for lithium compounds is only starting and has many decades ahead of it, Adams explained, adding that the new energy industry is not just about NEVs but also about electricity grid storage.

* All lithium carbonate and hydroxide prices are available in the Industrial Minerals’ Battery Price Report. Lithium technical and industrial grade prices are available on the Industrial Minerals pricing database.

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