Battery Metals Sector: Key Factors That Could Move Markets in 2020

Discover what the coming year could have in store for battery metals such as lithium, cobalt, and graphite

The Northern Miner | February 3, 2020 | SmallCapPower: In 2019, the world’s largest electric vehicle (EV) market contracted. According to the Chinese Automotive Manufacturers Association, NEV sales reached 1.206 million last year, around 4% lower than in 2018 and 20% lower than China’s target for the year. In the U.S., the reduction was equally noteworthy at around 10% year-on-year. A sluggish global automotive sector and changing subsidies were certainly contributing factors. Nevertheless, it’s clear that EVs are not yet ready to stand on their own feet.

(Originally published on on January 30, 2020)

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This year, several major automakers are launching “mass-market” EVs on dedicated platforms, aimed at breaking down range and cost barriers. While we expect substantial quantities of these to trickle into the market in the second half of the year, annual passenger EV sales are likely to remain below 3 million. China’s move to postpone the complete removal of NEV subsidies this year will support EV sales but also highlights just how sensitive the EV market still is to subsidies and incentives.

Bigger and better batteries
Cobalt prices soared in 2018 and the push towards high-nickel, low-cobalt batteries was accelerated. Last year, China commenced the first large-scale production of NMC 811 cells to be used in the automotive sector. This year, we expect only a handful of EV models outside of China to opt for the high energy density technology until the safety challenges are fully resolved. Within China, 2020 could be the year that LFP chemistries get a comeback as significant energy density improvements make LFP a much more viable option.

Range continues to deter many consumers from purchasing EVs, with long ranges the preserve of high-end luxury cars. Automakers are not unaware of this and nearly every new model boasts a bigger battery offering more miles per charge. We expect this trend to continue through the short term. As with most EVs, the first configurations to be sold are the highest specification models, typically utilising the largest battery pack. The average pack size over the next few years could be boosted as these specifications are front-loaded into the market.

Lithium – Another poor year
Not even lithium producers are anticipating a rebound in the lithium market this year. Compared to many bullish demand expectations, 2019 was particularly weak, and excess in the market pushed prices downwards. Nearly every lithium reference price fell by at least 30% and reported sales prices followed the same trend. We expect price declines to extend over the next twelve months. A temporary lull in the market might be exactly what is needed for the LME to launch its new lithium contract this year. The contract is not going to be welcomed by all lithium players; however, we believe it is a step forward to increasing transparency in lithium pricing.

Oversupply was the common theme during 2019 and despite several closures and expansion cut-backs, we do not expect any tightness through the short term. The hard-rock producers have demonstrated how quickly spodumene concentrate can be brought online, but a greater level of discipline is now required for 2020. Some higher cost producers will feel the pressure this year as spodumene prices fail to recover. The economics of new projects now look less attractive and junior miners will increasingly have to emphasise their green credentials and strategic locations, something the battery and EV space is being heavily scrutinised on.

As for the brines, 2019 supply growth was higher than in 2018. The same will be required again this year for brines to keep their share of the market. Low prices might not weigh as heavily on the brine producers, typically sitting at the bottom of the cost curve and having produced at these levels before. The ramp-up of South American brines will most likely be slower than guidance with water rights and technical challenges still key issues.

Cobalt – Can we fill the gap?
Last year cobalt output mined in the Democratic Republic of Congo contracted as the industry contended with both the slowdown in demand from EVs and electronics, but also ‘indigestion’ after the huge supply response in 2018 that had overstocked the supply chain. Weaker fundamentals naturally impacted price levels, with the LME cash price averaging US$33,290 per tonne (US$15.1 per lb.) for the year. This weak pricing environment, and higher operating costs led industry-leader Glencore to place its Mutanda mine on ‘care and maintenance’ from late last year. With Mutanda currently the largest cobalt producing mine in the world, the company has left quite a large gap to fill. Can it be done? We think just about – but with risks.

Mutanda’s suspension will of course place more of a burden on Glencore’s other DRC operation, Katanga. Katanga has been dealing with quality issues related to uranium content over the last year, yet interim solutions appear to be bearing fruit. We estimate around 5,000 tonnes of cobalt in hydroxide may have been exported last year, versus production of 14,000 tonnes. Glencore is currently targeting production of 27,000 tonnes of cobalt in hydroxide in 2020 from Katanga – with export levels dependent on the continued successful implementation of de-bottlenecking schemes.

Aside from Glencore, the most likely source of ‘replacement’ tonnes is ERG. Its Metalkol RTR plant got off to a slow start last year–dealing with both quality issues and the poor market. We estimate exports of just around 3,400 tonnes in 2019, versus capacity of ~14,000 tonnes per year. Yet RTR will need to at least double shipments in 2020 if we are to avoid a large deficit. Other major players such as CMOC’s Tenke Fungurume look unlikely to be able to materially increase output, while new supply from Chengtun and the recently started Deziwa operation will also be required to meet demand growth.

Our base case view is that mined output returns to 2018 levels. While we do have a notional deficit of some 2,000 tonnes forecast this year, we expect this is necessary to further draw down the stocks that have accumulated through the cobalt value chain. We believe price risk is on the upside this year should the major producers fail to ramp up, and higher prices are required to incentive higher cost supply into the market.

Graphite – After the Balama drama
While key battery metals like lithium and cobalt have suffered from the slowdown in EV sales in the all-important Chinese market, for the likes of graphite – a 1-million-tonne-plus industry primarily driven by the steel sector – the fundamentals are more complex. In the natural flake market, last year saw a steady ramp-up in exports from Syrah Resources’ Balama mine in Mozambique. This gradually overwhelmed the previously insulated Chinese flake market and eroded price levels as the year progressed. The extent of the oversupply eventually saw Syrah trim its own output in the final quarter, and its guidance for 2020 for 120,000 -150,000 tonnes.

As 2020 gets underway, there are many questions associated with the flake market. For a start, does the natural graphite industry even need a mine as large as Balama right now–which at full capacity (350,000 tonnes per year) would be larger than current global consumption of natural graphite in batteries? And is there a future for the other flake graphite projects looking to move into production in this environment–particularly given a seeming resurgence in interest in synthetic graphite?

Medium-term demand prospects for graphite remain strong, with disruptive technologies like silicon or even lithium metal-based anodes unlikely to dampen growth anytime soon. However, with this fledgling sector already overwhelmed with supply, 2020 looks likely to be another challenging year. With margins being squeezed, and an increasing focus on sustainability encouraging ex-China sourcing, many graphite miners, including Syrah, will continue to move down the value chain towards high-purity spherical graphite.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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