Lithium Prices Near $90K; Stocks Dip After Brief Rally

The lithium mining industry,once experiencing a brief period of exuberance akin to a fleeting tourist visit,has plunged into a wave of setbacks and readjustments.As of June 27,2023,the market has seen an alarming trend with lithium-related stocks reporting significant declines.Notable players such as Rongjie Co.(002192.SZ),Zhongkuang Resources (002738.SZ),Ganfeng Lithium (002460.SZ),and Tianqi Lithium (002466.SZ) each faced drops exceeding 3 percent,highlighting the pervasive nature of this downward spiral.

Recently,a number of domestic lithium enterprises,which had ventured into overseas investments,have been forced to divest their lithium resources.This shift mainly stems from stringent governmental actions.For instance,both Tianqi Lithium’s interests in Chile’s SQM and Ganfeng Lithium’s lithium clay resources in Mexico are now threatened by potential nationalization efforts from local governments.These developments have cast a shadow over the future profitability of these companies,leading to increased uncertainty in their operations.

Compounding these challenges,lithium carbonate futures have seen a drastic decline,lingering around the 90,000 yuan per ton mark,significantly encroaching upon the cost lines of many enterprises.The drop in prices has been acute,where Ganfeng Lithium's shares fell to a mere 29.24 yuan per share,after dipping to an intraday low of 27.77 yuan,starkly contrasting its peak of 157.4 yuan in September 2021.Tianqi Lithium's stock has similarly plummeted,losing approximately 43% since the beginning of the year and closing at 30.57 yuan as of June 27.

The persistent downturn in the lithium sector reflects broader trends within the market,where the price of lithium carbonate has entered a pronounced downward trajectory,exacerbated by increasing supply amidst waning demand.The recent averages from Wind indicate that,of the 19 A-share listed companies within the lithium mining sector in June,every entity aside from Salt Lake Co.has seen a decline,with an overall average loss exceeding 11% for the month.From the start of the year,the picture has only worsened,with an average drop of 24.7% across the board.

Aligned with these figures,futures on lithium carbonate continue their freefall,closing at 94,600 yuan per ton on June 27,a cumulative drop of 12.8% for June alone.From an early 2023 benchmark of 500,000 yuan per ton,prices have nose-dived to around 90,000 yuan per ton.Data from Shanghai Steel Union released on June 27 stated that the average price for battery-grade lithium carbonate fell to 90,000 yuan per ton,while industrial-grade averaged at 87,000 yuan,and battery-grade lithium hydroxide (coarse) hovered around 83,000 yuan per ton.

Analysts,such as those from Baichuan Yingfu,highlight the volatile nature of the lithium carbonate futures market,noting a slight uptick in transaction volumes that,however,primarily stems from trades between merchants.Larger downstream customers remain hesitant,while smaller firms are taking advantage of low prices to meet critical needs.A general consensus suggests that the current supply-demand dynamics of the lithium carbonate market are unlikely to reverse in the short term.Even amid trends of factories planning maintenance or output reductions,supply appears abundant,and weak demand shows no signs of recovery,leading to anticipations of price fluctuations between 85,000 yuan and 92,000 yuan per ton.

From an overarching industry perspective,a report from Zhongyuan Securities indicates that since the beginning of 2024,the lithium battery sector has experienced a staggering 26.43% drop,largely underperforming compared to the broader CSI 300 Index.Projections for 2024 anticipate that while demand for lithium batteries will continue to rise,the pace of that growth will decelerate,further straining the industry’s profitability.Expectations remain bleak,with segmented market performances diverging significantly.

Compounded by these domestic hurdles,China’s lithium market faces escalating pressures from overseas resources,which also find themselves ensnared in fluctuating uncertainties.On June 24,Ganfeng Lithium announced that due to the Mexican government's lithium nationalization policy,the operation of one of its major projects had been impeded,with mineral rights revoked.As a result,Ganfeng has initiated arbitration processes with the International Centre for Settlement of Investment Disputes,while engaging in negotiations with local authorities.This announcement drew significant attention within the sector due to its implications for Ganfeng’s operational viability.

This sequence of events echoes pressing narratives surrounding Tianqi Lithium,which also faces its share of unpredictability regarding offshore investments.According to a June 2 announcement,Tianqi’s partner,SQM,has entered a joint venture agreement with Chile's state-owned copper mining firm,Codelco,to exploit the Atacama salt flat.This arrangement ensures that starting in 2025,70% of profits will be redirected to the Chilean government,thereby eroding potential returns for Tianqi.

Back in 2018,Tianqi committed a staggering USD 4.066 billion to acquire a 23.77% stake in SQM,marking it as a significant player in the latter's operations.However,with Tianqi experiencing crushing debt and losses for three consecutive years,the outlook has dramatically shifted.Furthermore,in the first quarter of this year,the firm reported revenues plummeting by 77.42% year-on-year to 2.585 billion yuan,with net profits spiraling into loss by nearly 180% due to decreased investment returns from SQM.The latest tax litigation reported by SQM threatens losses potentially amounting to USD 1.1 billion in net profit for the first quarter of 2024.

The ramifications are profound,as Tianqi stated that its status as SQM’s second-largest shareholder would inevitably impact investment returns and rights to governance within the company,suggesting potential impairments on the investment.Similar challenges plague Zhongkuang Resources,Shengxin Lithium Energy,and Zangge Mining,revealing a pattern of forced divestments from investments in lithium mines located in Canada.

Industry insiders contend that investments in overseas mining ventures are significantly impacted by a mélange of international politics,economic circumstances,regulatory frameworks,and market environments.Such investments carry inherent unpredictability; while borrowing to finance growth during prosperous times can enhance overall business performance,downturns can conversely turn unexpected profits into drag on financial stability.