Rob Weir

I've been tagged in close to 30 posts over the last 2 weeks, so here are my quick thoughts on the lithium market as I sip my morning coffee. The recent downturn is in my opinion is simply the downstreaming is bottlenecked. CATL is at 95% utilisation and hence the consumption of lithium ore is capped until more downstreaming capacity is built (which it is and at a rapid pace). So we are in a period where its a perfect time to drive down the GFEX. Given it seems there is currently a downstreaming bottleneck, driving down the price of lithium makes sense and it's a good opportunity to do so. One thing i have noticed is it seems the lithium stockpile data presented out by the likes of SMM and Mysteel are being treated as gospel by most lithium commentators. The truth is nobody knows how much LCE China has stockpiled. You used to go to jail for having this type of information (research Stern Hu if you think its a conspiracy), now people think they are going to give it out for free? Therefore, I pay zero attention to public stockpile data. Also, you need to understand, It doesn't matter if you're in a deficit or surplus, the GFEX can be manipulated thanks to a little something called inventory. You can keep manipulating the futures price until you've got insufficient deliverable material. That's when it gets messy. Made up example: Demand = 3.7 Mt of LCE/year Supply = 3.6 Mt of LCE/year Inventories = 50 kt of LCE Now there is a 100 kt annual deficit. That 50 kt inventory can conceal the deficit: Month 1: inventories fall -8.3kt Month 2: inventories fall - 8.3kt Month 3: inventories fall - 8.3kt Month 6: Inventories become 0. Whilst this is going on, imagine a large participant aggressively sells GFEX futures. Heavy selling could push GFEX from 150k to 100k. The market can initially look supplied because consumers are receiving material. But they're partly eating into the stockpile. And this can carry on as long as by month 6 you're comfortable you can replenish the stockpile. It is 100% in the interest of the people consuming lithium to do this. That said, i think this strategy fails because: 1.) The incentive price to bring on new mines is being under estimated. The price needs to stay above ~$2500 USD for a decent amount of time for financiers to gain confidence to start funding these projects. 2.) The more these rapid price fluctuations happen, the harder each time it is for mine restarts, expansions, etc. to take place. Raise money, restart, care and maintenance, raise money, restart, care and maintenance. All over short time frames. It breaks people's confidence in the lithium market and it will be harder and harder for mines to get funding each time this cycle occurs. 3.) CATL is running at a ~95% factory utilisation rate with production of 498 GWh. Their production capacity is essentially full. Hence the demand for lithium is currently bottlenecked until expansion takes place. This buys time until the 764 GWh under construction is completed. 4.) Greenbushes is aging, Manono isn't going to be the prized jewels people think it will be, many mines greatly under perform from their studies, governance issues in Zimbabwe, lack of infrastructure in Nigeria and instability in the likes of Mali and the DRC. All of the above will put extreme pressure on the stockpiles. Inventory can hide a deficit short term, but it cant eliminate one. Cheers for reading!