Summary
- Lithium market has been in a doldrum before the emergence of COVID-19 over the supply glut; however, while lithium producers undertook a scale back in the wake of tumbling prices, the emergence of COVID-19 has taken a toll on the demand.
- In the wake of falling demand for lithium chemicals, prices of spodumene has taken a considerable hit with an average fall of 17 per cent during the first five months of the year 2020.
- In the short-run, the weak price environment is anticipated to prompt Australian miners to maintain their pullback; however, industry experts anticipate that lithium demand could spike post 2020 over higher uptake of EV across the globe.
- To avoid any future bottleneck in the supply, Chinese lithium chemical and battery manufactures are now either securing or extending their existing offtake with Australian suppliers.
- Yahua International Investment and Development Co Ltd has now extended its offtake agreement with Galaxy Resources Limited (ASX:GXY) by further three years.
Lithium market has been a tough ride for many ASX-listed lithium mining stocks over falling demand and tumbling prices in the wake of COVID-19 outbreak. The spodumene price (delivered to China) plunged by 17 per cent during the first five months of the year 2020 to reach USD 425 a tonne, which now many industry experts believe would be the new normal for spodumene until after 2022.
- In the wake of tumbling prices, the lithium production across the continent is estimated by the market to slope downward, and the Department of Industry, Innovation and Science (or DIIS) anticipates that the production would fall by ~ 37.01 per cent in 2020-21 to stand at 131,000 tonnes of lithium carbonate as compared to the output of 208,000 tonnes (LCE) in 2019-20.
However, post 2020-21, the lithium production across the continent is anticipated to surge over improvement in prices and estimates of increasing EV uptakes after 2022, leading to a production spike in 2021-2022 till 146,000 tonnes (LCE).
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Production Plunge and Increasing Contract Volatility
Lithium production during the March quarter fell by ~ 18 per cent among ASX-listed miners while their shipment observed a fall of ~ 14 per cent, which is further anticipated by many industry experts to continue over price induced slowdown in the short-run.
However, the lithium demand is anticipated by DIIS to gain some steam post 2020 and considering the recent aggressive long-term offtake by undertaken by Chinese battery manufacturers, the anticipation of a surge in demand over coming years makes further sense.
In the recent past, Chinese battery manufacturers have been securing long-term offtakes to avoid any future bottlenecks in the supply chain, which could possibly arise due to an anticipated sharp pullback in the production from miners amid a weak pricing scenario.
- For example, Contemporary Amperex Technology Co. Limited (or CATL) through its chemical suppliers continues to try to secure long term supply in spodumene. The Company recently secured offtake with Pilbara Minerals Limited (ASX:PLS) via a related party, Yibin Tianji.
- Likewise, other battery manufactures are also securing spodumene supply from various Australian suppliers. Both Pilbara Minerals / Yibin Tianji and Altura / Hunan Yongshan Lithium Co. Ltd recently secured offtake agreements.
Yahua International Extends Offtake With Galaxy Resources
China based, Yahua International group, engaged in manufacture and sale of civil explosives, has recently launched a new plant capable of 20,000 tonnes per year of lithium hydroxide production in Sichuan province of China, for which the Company has now secured a spodumene contract as well.
- Yahua International Investment and Development Co Ltd further extended the offtake with GXY for further three years to 31 December 2025; however, the contract extension remains conditional upon Yahua continuing to meet the terms of the current agreement up to 31 December 2022 and a mutual agreement concerning the pricing mechanism between 2023 to 2025.
- Yahua has agreed to purchase a further 30,000 dry metric tonnes of 6 per cent lithium oxide spodumene during the remainder of 2020 and 120,000 dry metric tonnes from Mount Cattlin or each calendar year from 2021 to 2025 on a take or pay basis.
- Furthermore, the offtake price of the shipment would be agreed between the parties on a spot cargo CIF (Cost, Insurance and Freight) basis up to the end of 2022, and a pricing formula for the extension would be agreed prior to the end of 2022.
The recent offtake extension of Yahua with Galaxy, further supplements the existing contract of GXY with Meiwa Corporation of 55,000 dry metric tonnes per annum for 5.7 per cent spodumene concentrate up to 31 December 2021 (take or pay) and a 45,000 dry metric tonnes per annum of 6 per cent lithium oxide spodumene contract in 2020 and a further 60,000 dry metric tonnes in 2021 and 2022 with Yi Chun Yin New Energy Co., Ltd on a take or pay basis.
In the present situation, the production scenario across the continent has become more volatile with many miners no longer quoting average realised price and costs of production, instead, quoting their recovery rates, and in the status quo, recovery rates are also tumbling over campaign-style operations and stockpile processing.
For example, many Australian producers except few such as Pilbara Minerals and operations such as Greenbushes, have achieved only 55 to 60 per cent recovery, which in turn, is further supporting the market view that the current pricing environment could bring the production further down in the short-term.
In a nutshell, the production scenario across the continent is becoming more volatile over tumbling spodumene prices across the global front, which is now prompting ASX-listed miners to pullback production.
However, the market anticipates that after a short-run, post 2020, the demand for lithium chemicals could pick pace, and the market anticipation seems to be on some solid grounds, which could be inferred from the recent offtake activities of Chinese lithium chemical producers and battery manufactures.
Most of the Chinese lithium chemical and battery manufactures are extending their offtake with Australian suppliers to avoid any future bottleneck in the supply chain, which could arise in the short-term amid spodumene pullback from Australian miners.
In the recent events, Yahua has extended its offtake agreement with Galaxy Resources by further three years, and the pricing of the agreement is also flexible.
While the current pricing undertaken by GXY with Yahua is on a spot cargo CIF (Cost, Insurance and Freight) basis up to the end of 2022, the price of the long-term extension would be decided later and considering the recent GXY’s pricing method; it should ideally reflect the prevailing market condition in future, which is anticipated to improve after 2022.
