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RPT-COLUMN-The lithium supply battle starts to heat up: Andy Home
September 21, 2016 / 1:00 AM / in a year

RPT-COLUMN-The lithium supply battle starts to heat up: Andy Home

(Repeats Sept. 20 column. The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, Sept 20 (Reuters) - The lithium rush is on.

Not a day goes by without an exploration company telling us about an exciting development on their property, which is now a lithium prospect irrespective of what minerals were originally being hunted.

Today it is the turn of Premier African Minerals, providing “a positive update on its 2,500-meter drilling programme at the company’s Zulu Lithium Project near Fort Rixon in Zimbabwe”.

Tomorrow it will be someone else.

Everyone, it seems, is trying to jump on the lithium bandwagon, fuelled by Tesla and other electric auto pioneers and propelled by rapidly rising prices and the promise of more to come.

It is a boom. Whether it turns to a bust is a hotly discussed topic across social media and internet forums.

Sceptics point to past excessive exuberance in metallic bubbles such as rare earths as a warning of what may lie in store.

And there is an obvious analogy. While no-one doubts lithium’s demand prospects, the big unknown is how much supply will be there to meet it. Too little or, as turned out to be the case with rare earths, too much?

Key to answering that question will be the behaviour of the big four producers that currently dominate the lithium supply landscape.

Some of them are now starting to make their moves, first and foremost by extending and tightening their grip on the lithium supply chain.

CONSOLIDATION AND CONTROL IN AUSTRALIA

Greenbushes in Western Australia is the world’s largest hard-rock lithium resource and it was at the heart of the last major consolidation wave among the lithium establishment.

Its joint owners are Tianqi Lithium and Albemarle. The former snapped up the previous owner Talison Lithium in 2013 and then sold a 49 percent stake to Rockwood Holdings, which was itself subsumed into Albemarle in 2014.

Now both partners seem intent on extending their footprint along the downstream supply chain.

Tianqi has just announced its intention to build a A$400 million ($306 million) plant, also in Western Australia, to convert the mine’s output into high-grade lithium hydroxide, the form of the metal needed for automotive and energy storage batteries.

Albemarle, which had been toll-refining its share of Greenbushes’ output at Jiangxi Jiangli facilities in China has signed a definitive agreement to buy out the Chinese company.

The transaction, expected to close in the first quarter of 2017, will “accelerate our strategic goal of capturing 50 percent of the growth in the lithium industry”.

CONFUSION IN CHILE

Tianqi’s ambitions extend beyond controlling its own Australian supply chain.

It has thrown its hat into the ring for the 23 percent stake up for sale in SQM, another member of the lithium establishment with brine and conversion operations in Chile.

It’s a bold move. There is both “complexity and uncertainty around the transaction”, as another Chinese bidder, Ningbo Shanshan, noted with considerable understatement in explaining why it withdrew from the running.

A history of political scandal, a long-running stand-off with CORFO, the Chilean development agency that controls the rights to the brine deposits in the Atacama desert, and a government investigation make for a highly inflammatory cocktail.

Tianqi’s bid for the SQM stake, however, is a very clear statement of intent to rise up the four-strong hierarchy of established producers.

The fourth member of the establishment is FMC. It alone has stayed out of the recent investment fray, choosing, for now at least, to go down the organic growth route.

FLEXING CAPACITY

This flurry of activity reflects both an internal establishment battle for market position and the build-out of defences against the hordes of new and would-be producers trying to grab a slice of the lithium action.

Implicit in the latter ambition is the ability of the big four to increase production and retain market share.

Both Tianqi’s new Australian plant and Albemarle’s swoop on Jiangxi Jiangli are predicated on an expansion of activities at the Greenbushes mine.

Talison doesn’t currently disclose either capacity or production levels at Greenbushes but it’s studying an expansion which would double both, Chief Financial Officer Lorry Mignacca told Reuters.

Engineering studies on the expansion are due to be completed by the end of this year or early 2017 with any expansion timed to complement Tianqi’s proposed start-up in 2019.

There is similar flex within Chile, albeit one that is currently constrained by the dark political web surrounding SQM.

For its part FMC seems confident it can triple its hydroxide capacity by redirecting existing lithium resource towards battery-use products.

It’s a stance that has raised a few eyebrows among the lithium cognoscenti but FMC claims “our manufacturing network is highly flexible, which allows us to increase capacity or accelerate expansion plans as customer needs warrant”.

NEWCOMERS

Meanwhile, the first wave of challengers to the big four is arriving.

Orocobre is currently ramping up production at its Salar de Olarez brine operations in Argentina.

Extracting lithium with the right purity and, equally importantly, with the required tight levels of impurity is a tricky business and Orocobre has experienced its share of teething problems since first production began last year.

But the company is guiding towards production of 15,000 tonnes of lithium carbonate in the financial year to June 2017, up from 6,900 tonnes in the first year of operations.

And more, many more are coming behind Orocobre.

What price lithium will command by the time they arrive is the big unknown.

Can the establishment lift production enough to deter the incomers? Or will it collectively fail to meet lithium’s expected super strong demand growth with all the bull market implications such a shortfall would entail?

What we’re seeing now are just the opening strategic moves in a battle that will be waged for many years to come.

Editing by Susan Thomas

Our Standards:The Thomson Reuters Trust Principles.
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