Benchmark counters Goldmans take on lithium

Goldman Sachs (GS) has bigger things on its mind with the stockmarket slump and implosion in crypto, but its claim in late May of a looming oversupply in lithium that would end the current lithium boom has been well and truly debunked by UK group Benchmark Mineral Intelligence.

The GS report triggered a selloff in lithium stocks in Australia and around the world with its alarmist claims that the lithium price boom was over (for now) and China would fill the gap in supplies of the metal.

The claim that worried investors here was the forecast slump in the price of lithium from an average around $US55,000 a tonne for this year to $US16,372 a tonne in 2023.

And even though strong sales of electric vehicles in China in April and May – as sales of internal combustion powered vehicles slumped – helped assure the market, the GS report has stuck around in the minds of investors.

Benchmark’s report pointed to the errors in the GS research and said ““As the market wrestles between long-term supply security to fuel the lithium-ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning.”

Benchmark’s report detailed five reasons why GS was wrong – first up it believes China’s low quality hard rock and brine resources means the industry cannot rely on feedstock from the country to meet market demand.

“China’s deposits of lepidolite, which Goldman expects to add significant new supply volumes, may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply. Chinese lepidolite processing has a high waste-to-ore ratio of 20:1, subsequent high waste-disposal costs, and high processing costs, all of which make it a marginal source of lithium. Associated opex and rampup times are also commonly underestimated.”

Secondly, capacity additions from new and older producers does not stock to development timeframes and supply estimates. It instanced as an example the IGO/Tianqi Lithium’s Kwinana refinery near Perth – announced in 2016 with a 2018 production date which is now 2025!

“Building upstream of the EV battery supply chain takes time and rarely goes to plan,” Simon Moores, chief executive of Benchmark Mineral Intelligence, said. “For Tianqi it’s been the best part of a decade.”

Benchmark pointed out that new lithium supply has a higher cost base as deposits with unconventional mineralogy, lower grades, and higher strip ratios are developed and new, often smaller, converters struggle to keep costs down.

GS made an error in (as many others do) assuming there is a single price for lithium. “There is no single lithium price – a large portion of the market is under long term fixed and variable price contracts, meaning it will take time for spot and contract prices to converge,” Benchmark pointed out.

Benchmark said GS also was mistaken in classing as ‘new capacity’ chemical capacity being used to reprocess material that does not meet downstream specifications.

“(T)his “merely represents lower efficiency production rather than the introduction of new lithium units to market,” according to Benchmark’s note.

Not only will a lot of this new capacity operate at a low utilisation rate in the initial years of production (if not, indefinitely), a significant proportion of capacity that does find its way to market is locked into reprocessing or tolling arrangements which will not address the underlying market shortfall.”

Benchmark expects the market will remain in structural shortage until 2025 and expects changes to pricing mechanisms and more contracts between producers and customers, as Tesla has been doing with the likes of BHP Nickel and other companies.

The lithium market will balance over the next few years, but it’s unlikely that an unprecedented ramp up of marginal, unconventional feedstock will fill the deficit. It is also unlikely that demand will weaken significantly.

It will be a touch-and-go market balance; but there will not be the structural oversupply that Goldman Sachs is predicting.

In a period when we’ve seen prices top record highs persistently over the past 10 months, a correction in the lofty spot market prices seen in China is likely. End-users can only absorb so much cost pass through before it has an unsustainable impact on their electric vehicle ambitions, Benchmark pointed out.

“The spot market price in China does not represent the true price of lithium in the market, and is often not the true price being paid by western battery majors.

“In these markets we expect to see a gradual ramp up in contract deals being settled with increasingly flexible, and more frequent, pricing mechanisms,” Benchmark added.

Benchmark’s reasoning echoes that from Canacord Gennuity’s Reg Spencer, who at the time of the GS report and its media propagation said it was just wrong.

“That oversupply in the market that Goldman Sachs is referring to is in lithium production from China lepidolite sources which is lower grade, difficult to process and more expensive to process in comparison to spodumene,” Spencer said at the time.

“I’ve been covering this sector for seven years and I can tell you supply always disappoints, especially from unconventional sources such as lepidolite that Goldman Sachs is referring to in their research report.

“Lithium projects are always behind schedule, always, and to say that the world’s supply issues are going to be resolved in three years from unconventional resources, which means higher costs to produce and extract…I think is wrong.