The dynamic of the cost of lithium demonstrates a rapid decline, which has already led to the fact that this indicator was at the lowest level in the last two years.
Experts say that the current state of affairs is the result of concerns about the prospects for consumer demand in China. In this case, it implies a broader trend associated with a low level of confidence in the ability of the world’s second-largest economy to recover quickly and unhindered after the recession caused by the coronavirus pandemic, and against the background of tensions between Washington and Beijing, which have already caused various restrictions in the technology sector.
Lithium is the main component of batteries for electric vehicles. The cost of lithium carbonate last week fell to the level of 166,500 yuan ($22.8 thousand). This happened on the eve of the holidays of the second Golden Week, the anniversary of the founding of the People’s Republic of China. In this case, the decline was rapid. Less than a year ago, the price of the metal reached a record level of 598,00 yuan ($83.3 thousand) per ton.
The negative vector of economic movement has already become a factor affecting the financial well-being of lithium producers. The share price of the Sprott Lithium Miners ETF has fallen to its lowest level since the company was founded in February. A similar indicator of the Global X Lithium & Battery Tech ETF showed the strongest drop in the last three years,
In the fourth quarter, China has traditionally recorded an increase in demand for lithium. This is partly due to the fact that this country is the largest market for electric vehicles. By the end of the year, manufacturers of vehicles of the mentioned category replenish stocks of raw materials. The fact that this year the trend that has become traditional is not observed is evidence of a significant decline in the country’s economic system on a global scale. Manufacturers do not believe in the growth of consumer demand. The lack of purchases of raw materials is an indicative action that can be interpreted as pessimism of companies regarding the prospects of market dynamics.
Susan Zou, an analyst at Rystad Energy research company, at the same time, says that significant replenishment of reserves will still be carried out. According to her, battery manufacturers have significant volumes of raw materials that need to be reduced. In China, the effect of the so-called deferred demand is indeed expected, but its scale is not so large that companies refuse to create a kind of resource base for the production of products in the near future. Expectations regarding the prospects of the world’s second economy have a distinctly negative content. The assessment of the future reflects the difficult situation in China. In this case, the economic dimension of the functioning of the country as a kind of production and financial center is implied.
Wanyi Shao, an analyst at Guotai Junan Futures Co, says that falling prices may trigger a supply restriction. According to him, this prospect is especially relevant for lepidolite mines in China. The expert says that the probability of this scenario is evidenced by the current rate of decline in demand. He notes that manufacturers of cars and batteries are acting as part of a tactic of caution when dealing with issues of restocking. The analyst explains this concept of behavior by the fact that the level of consumer demand was lower than expected volumes.
In China, companies specializing in the production of cars are currently making efforts to maintain and, if possible, strengthen their market positions against the background of negative external circumstances that shape the state of affairs, which can be described as a situation of economic uncertainty. According to the consulting firm Counterpoint Research, in the second quarter of the current year, sales growth of electric vehicles in this country slowed to 37%. At the same time, the global average is 50%.
Goldman Sachs Group analysts predict a further decline in the cost of lithium carbonate over the next 12 months. In a note released at the end of September, they stated that by the end of this year, the main focus is likely to be on the seasonal growth of electric car sales in China, noting that any disappointment in the dynamic of this process compared to the so-called historical norms will become a factor of pressure on the price range and is likely to accelerate the declining cost.
Some experts say that the current downturn is a good opportunity to buy lithium stocks. This position is justified by the assumption that over the next decade, the expected growth in demand will support long-term prices. Also, some analysts expect an increase in the level of global demand for lithium by almost five times by the end of this decade.
The popularity of electric vehicles in the context of modern realities is an economic indicator that, in terms of significance, goes beyond the intra-industry context. In the period of global striving for the so-called green transition, the production of cars without internal combustion engines and the ability to carry out relevant activities largely determine the potential of the country. The slowdown in the dynamics of the Chinese electric vehicles sector has a negative impact on the entire economic system, albeit on a limited scale.
As we have reported earlier, China’s Central Bank Calls On Financial Sector to Help Fund Technology Research.