Evolution in China’s lithium supply chain paves way for commoditization

By Martim Facada
Published: Friday, 01 November 2019

Lithium has traditionally been considered a specialty chemical, but it has been acting more like a commodity in recent years, according to analysts. Martim Facada considers how this development was sparked by the growth of the Chinese industry and raised quality expectations.

Once considered a specialty chemical produced and sold on spec for niche uses, lithium looks set to join the ranks of the world’s traded commodity products - albeit in relatively minor volumes.

Increasing production of lithium chemicals from diverse sources, higher quality requirements in China and frequent and sudden adjustments in global supply and demand have led to price volatility in lithium materials and made these products more fungible.

Growth in Chinese lithium compound production and the rising number of companies able to supply good quality lithium, domestically and overseas, have been major factors in transforming lithium into a commodity-type product.

China accounts for over 65% of global battery production and more than half of the world’s total lithium chemical production.

Fastmarkets analysts expect global supply to reach 355,000 tonnes of lithium carbonate equivalent (LCE) in 2019 on rising Chinese production, outstripping demand of 300,000 tonnes. 

The most commonly produced lithium-ion batteries in China are lithium iron phosphate (LFP), lithium manganese oxide (LMO), lithium nickel-cobalt-manganese (Li-NCM) and lithium cobalt oxide (LCO). 

These can be produced using different grades of lithium carbonate and hydroxide.

LCO batteries are widely used in electronic consumer products, Li-NCM are mostly for pure electric vehicles (EVs), while LMO and LFP batteries are used in plug-in hybrid EVs (PHEV) and E-buses. 

Along with increased adoption of pure EVs and consumer demand for vehicles with longer driving ranges, global battery makers are looking to increase their market share in high-end battery chemistries, such as NCM 622 and 811, which require higher quality lithium carbonate and hydroxide.

Competition to drive down prices

"As competition rises with more producers able to produce battery grade material, [lithium compound] prices will fall," William Adams, head of battery raw materials research at Fastmarkets, said. 

"To take advantage of weaker prices, consumers will qualify more suppliers and that will further commoditize the products - we have already seen this start to unfold over the past year. Chinese producers have increased exports to global battery and EV makers since 2018," he added.

For most of 2019, surging supply of lithium chemicals from China has led to more competitive prices for consumers in Japan and South Korea. 

Lithium prices have fallen for most of 2019 in China. As of mid-October, the lithium carbonate, 99.5% Li2CO3 min, battery grade, spot price exw domestic China, had fallen by 40% year on year to 56,000-61,000 yuan ($7,829- 8,528*) per tonne, from 72,000-80,000 yuan per tonne a year earlier.

Hydroxide monohydrate prices have been on a similar downtrend. Fastmarkets’ assessment for lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, exw China, has plunged by 44% over the same comparison period to 60,000-68,000 yuan per tonne from 110,000-120,000 yuan per tonne.

Japanese and South Korean cathode and battery makers have responded by procuring more material from China at fixed prices on a shorter-term basis of up to three months to one year, to manage the risk of falling prices.

"Some legacy lithium producers had limited capacity to supply the Japanese and South Korean markets over the past year, [but] good quality material alongside the lower prices offered from China have triggered an increase in Chinese exports to Japan and South Korea," Daniel Jimenez, partner at mining consultancy iLimarkets, told Fastmarkets.

The pool of battery-grade lithium producers in China, which currently comprises the likes of Tianqi Lithium, Ganfeng Lithium, General Lithium and Yahua Lithium, will likely keep increasing in size, analysts say. And, as more processors learn how to refine impurities, it will become easier to produce standardized products.

Physical proximity between lithium producers and consumers in China has allowed for shorter delivery terms - of five to 30 days - contributing to the booming Chinese spot market, in comparison to the typical mid- to long-term contracts in the rest of the world, which has historically been supplied by South American countries.

This increased delivery speed has contributed greatly to the commoditization of the lithium market.

*Conversion made October 2019

Battery Materials Europe 2019: Lithium prices to fall further

Price volatility in the lithium market is expected to persist for the foreseeable future, lithium companies and analysts said at Fastmarkets’ inaugural Battery Materials Europe Conference in Amsterdam in September.

The rapid supply response in China and Australia over the past two years has significantly increased the volume of material on the physical market, together with the choice of suppliers, delegates said.

On the sidelines of the conference, lithium producers told Fastmarkets that the large volumes of lithium chemicals produced in China were a major cause of the fall in prices, which they expect to slide further before the end of this year.