Can lithium carbonate’s premium over hydroxide persist in 2022?

By IM Staff
Published: Wednesday, 16 February 2022

The price differential between lithium hydroxide, which is usually the more expensive material, and lithium carbonate reversed in 2021. Davide Ghilotti, Zihao Li and Susan Zou give the reasons for that change, and consider what the effects of the likely supply-demand fundamentals for the two materials may have this year.

Last year marked a spectacular recovery in lithium prices, with the market rebounding into growth from the lows of 2020 and pushing lithium carbonate back to the forefront of the battery market. Underpinned by a renewed wave of demand in China and elsewhere, the relentless rise of lithium carbonate prices during 2021 took the compound to a premium from what was historically a discount against further-refined lithium hydroxide.

The counter-intuitive price progression took the sector by surprise, but market participants have argued that there are fundamental factors that may continue to support the carbonate premium over hydroxide into early 2022.

"What [2021] has shown is that carbonate is here to stay," one Europe-based lithium processor source told Fastmarkets. "The push on carbonate in 2021 [was] phenomenal."

Lithium prices more than doubled across the board during 2021, and the sector entered a new bullish cycle following the multi-year lows of late 2020.

Fastmarkets’ price assessment for lithium carbonate 99.5% Li2CO3 min, battery grade, spot prices, cif China, Japan & Korea, was $6.00-7.50 per kg in early January 2021. At the same time, the assessment for lithium hydroxide monohydrate LiOH.H2O 56.5% LiOH min, battery grade, spot price, cif China, Japan & Korea, stood at $8.50-9.50 per kg, showing a solid couple of dollars per kg of premium over carbonate.

That was broadly the way the two prices had interacted since Fastmarkets launched the assessments in 2017 – the spreads had widened and narrowed, but they never traded places. Last year changed that.

Fast-forward to January 2022, and hydroxide hit $41-43 per kg on January 27, 2022, a 366% increase at the mid-point compared with where it was a year before. Carbonate, meanwhile, had started lower but ended at a higher level than its further-processed cousin. The Fastmarkets carbonate assessment hit $44-47 per kg on January 27, 2022 – that is 574% higher than in January 2021 and, crucially, more than $3 per kg higher than hydroxide.

From December, Fastmarkets has increased its price assessment frequency to daily for the two seaborne Asia assessments of lithium carbonate and hydroxide.

An LFP battery story

The surge in carbonate demand and price is largely credited to the performance of lithium iron phosphate (LFP) batteries since last year, and their expected medium-term outlook.

Among the most tried and tested battery technologies, LFP batteries have a relatively low energy density compared with other chemistries, but they offer reliability, stability and safety. Costs of LFP are also lower than other batteries, such as nickel-cobalt-manganese (NCM), which employ costlier raw materials.

While LFP batteries were seen as somehow on the back foot in previous years, with original equipment manufacturers (OEMs) favoring higher-performance NCM or nickel-cobalt-aluminium (NCA) chemistries, developments over the past year have drawn a different picture.

LFP has cemented its position as the leading chemistry among manufacturers in China, currently the single largest market for electric vehicles (EVs). At the Antaike Nickel & Cobalt conference last November, attendees estimated that LFP batteries now account for the largest share (some 60%) of the market in China, with NCM taking most of the remaining 40%.

Outside China, LFP has also been gathering new interest from international OEMs. German automotive group Volkswagen said last March that it would adopt multiple battery technologies in its models across the group, depending on the type of car and consumer to whom they will be marketed. LFP will feature mostly in VW’s compact-vehicle range.

United States-based EV manufacturer Tesla announced last October that its standard-range models sold globally will employ LFP batteries.

Panelists speaking at Fastmarkets’ Lithium 2021 conference said that, although lithium-ion is set to remain the dominant technology for the EV market, the industry will simultaneously rely on various chemistries depending on performance, raw material costs and companies’ own strategies.

The outlook appears supportive of growing LFP demand – and, as such, will be key to determining the future price trend of lithium carbonate feedstock.

Premium to persist?

Market participants in conversation with Fastmarkets said that the current premium that the carbonate price holds against hydroxide is likely to persist throughout the first half of 2022, although the overall price differential between the two compounds will be elastic.

Sources pointed to a variety of factors that are expected to underpin this trend, including capacity ramp-up of LFP battery materials versus other chemistries; conversion capacity bottlenecks for carbonate against hydroxide; and the entrance of more intermediaries into the carbonate space.

The aggressive production ramp-up of LFP battery capacity to meet automotive demand will continue to challenge the availability of lithium carbonate, market participants said. As LFP chemistries gained new favor among major OEMs, producers in China that have until now been solely focused on NCM materials are keen to join in and are investing to supply LFP materials as well.

China NCM battery precursor materials manufacturing giant Huayou Cobalt announced in November that it plans to build an integrated plant with Xinfa Chemicals with capacity for 500,000 tonnes per year of LFP material.

"There will be a high ramp-up of LFP capacity, supporting battery-grade carbonate demand and price while, at least for now, NCM production has not [seen the same degree of expansion]," a China-based trader said. "Even with new NCM capacity, it will take a while before that is fully realized and translates into higher demand for hydroxide."

Market sources said they estimate that the annual production growth rate for LFP batteries will exceed 100% in 2022, while that of NCM batteries is expected to be around 30%. "Rising demand of LFP batteries will underpin the price for lithium carbonate and support a premium [over] hydroxide until mid-2022," a lithium producer in China said.

The Fastmarkets battery materials research team forecast a pick-up in both carbonate and hydroxide output in 2022, with carbonate rising by 118,000 tonnes and hydroxide rising by 70,000 tonnes.

"Given the changing demand for LFP, perhaps the market would have preferred less hydroxide, but with US and EU demand gaining momentum, more hydroxide is going to be needed anyway," William Adams, head of battery materials research at Fastmarkets, said.

Lithium carbonate and hydroxide prices  

Traders enter the fray

More intermediaries active in the market are expected to play a part in price projections. The high level of activity in lithium carbonate has attracted a growing number of traders to the space over the past year, which is likely to fuel further price volatility and accelerate price upturns while supply tightness persists.

A trader in China acknowledged that it is easier for traders to get involved in carbonate since it has fewer logistics restrictions and can be stored more easily and for longer. Conversely, hydroxide is mostly moved directly between producers and consumers since OEMs can only purchase materials from qualified producers – which effectively limits traders’ exposure.

The price parity achieved by lithium carbonate and hydroxide last September was mentioned as an example of this momentum when traders piled in to stockpile at the end of the quarter.

The September monthly average price of Fastmarkets’ battery-grade lithium carbonate assessment in domestic China rose by 56% to 160,000 yuan ($25,150) per tonne from the prior month – marking the single biggest monthly price increase since Fastmarkets launched the assessment. "While the carbonate market will be undersupplied in 2022, its price may rise more quickly [than hydroxide] with traders’ involvement," the same trader source in China said.

In addition, the seaborne Asia market is expected to mirror the domestic China market in early 2022, market sources told Fastmarkets, citing tighter availability of carbonate outside of China as a factor that would prop up the carbonate price against hydroxide.

"Supply of hydroxide is comparatively adequate in the seaborne market, with the additional Chinese output exported to Japan and South Korea, but China will export less carbonate since the bulk of it will be consumed domestically," the first lithium producer source said.

Elastic differentials

All that said, market participants believe the price differential between carbonate and hydroxide will be elastic during 2022. The potential for a widening price gap would push producers to shift more to carbonate, which in turn would ease the supply constraint and narrow the price gap between the two compounds.

Some have suggested that producers may be encouraged to convert their lithium hydroxide units into carbonate if the latter’s spot price is at least 20,000-30,000 yuan per tonne higher, given that the additional processing costs (a few thousand yuan per tonne) are relatively low.

"When the price gap allows converting hydroxide to carbonate, [tightness] in hydroxide should increase, which would support a higher price," a second lithium producer source in China said, adding that he expected an "equilibrium [to eventually develop between] the two prices."

Other sources pointed out that the new production lines in China are flexible in terms of switching between hydroxide and carbonate. Producers’ output could, therefore, be adjusted based on the price differentials in the market; this could go some way toward easing a carbonate shortage, but might also affect the bullish price momentum in carbonate.

A European processor distinguished between an immediate-term and a longer-term outlook. He said that the capacity constraints of carbonate would ensure a near-term premium to continue "in the first quarter and probably beyond that."

"In the long-term," he said, "I still think that hydroxide will ultimately be the more expensive of the two – it’s a further refined compound, needs additional processing, so it should go back that way. But until then, the carbonate premium will stay."