Lithium price plummeting: Oversupply of lithium causes price crash – what happens next?

• Lithium price fell by 80 percent
• Oversupply and declining electric car sales
• Lithium producers react

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Tesla boss Elon Musk has previously described lithium as “the new oil” and advised entering the industry. “Get into the lithium industry, there are profit margins of up to ninety percent, similar to the software industry, it’s like printing money,” said the Tesla boss according to “WirtschaftsWoche” in 2022 at a balance sheet presentation. In fact, lithium, which is required as an important raw material for the batteries of electric cars, experienced a surge in 2022. According to Yahoo Finance, up to $80,000 was paid for a ton of lithium in China at the time. Elon Musk also spoke in the spring of the “insane level” to which the price of the raw material had risen. But while Tesla is still building its lithium refinery, which has often been described as a “money printing machine”, the situation on the lithium market has now changed significantly – and there is no longer any possibility of practically printing money.

Lithium prices are plummeting – and there’s still no end in sight

Lithium prices are currently around 80 percent away from their all-time high from 2022. As “Yahoo Finance” reports, in February 2024 only less than 14,000 US dollars were paid for a ton of lithium in China – after 80,000 US dollars in 2022. Normally, the raw material, which is important for the electric car industry, is traded via non-public contracts, However, China, as the largest processor and consumer of lithium, announces the prices, according to the news magazine.

One reason for the price collapse is the slowing demand for electric cars, as the need for lithium for the corresponding batteries is also falling in this context. In addition, the supply of lithium grew significantly as producers expanded their capacities and new players entered the market or are still planning to do so. In addition to Tesla, ExxonMobil also plans to get involved in the lithium business. As a result, a lithium deficit has now become oversupplied – and this is likely to continue for the next three to four years, Frank Nikolic, analyst at business intelligence company CRU Group, told Yahoo Finance.

According to data from “Carbon Credits”, there was already a surplus of lithium of 40,000 tons in 2022, but market expectations still drove the price up further. However, according to the website, in 2024 the oversupply is expected to increase to 100,000 tonnes as even more production capacity comes on stream. A production increase of 35.7 percent is expected for 2024. This could push the price of the raw material even further down. According to Mining.com, the Australian Department of Industry, Science and Resources expects the spot price for the lithium mineral spodumene to fall to $2,200 per ton in 2025 – compared to an estimated average price of $3,840 per ton last year. And the price of lithium hydroxide, a refined version of the metal used in batteries, could fall next year from an estimated average of $52,450 in 2023 to around $30,000 per ton, the ministry said.

“We are in another bear market,” Keith Phillips, CEO of mining company Piedmont Lithium, told Yahoo Finance. “I really think we’ve gone from the euphoria of two years ago to the despair of today. Someone described it…as the height of pessimism,” Phillips continued. And the Australian Ministry of Industry, Science and Resources is also not predicting a quick recovery for the lithium price, according to “Mining.com”. “Due to the forecast supply excess, prices are not expected to return to previous high levels such as those seen in 2022 and early 2023 before 2025,” the report there said.

Lithium producers are increasing costs

The major players in the lithium industry have already begun to react to the changed market conditions. At the beginning of February, Piedmont Lithium announced cost-cutting measures, which included, among other things, job cuts of 27 percent. In addition, due to the current lithium price environment, the pace of development and capital expenditure for the projects under development in the USA are to be adjusted. “While these cost-cutting measures are difficult, they are necessary to position the company for the long term. Lithium prices have fallen sharply and the market consensus is currently negative,” Piedmont Lithium CEO Keith Phillips was quoted as saying in a press release. “Announcements of capacity cuts and postponements of new projects have been commonplace recently and are likely to become more frequent,” Phillipps continued.

In fact, the industry leader Albermarle has also announced that it will cut jobs and reduce spending on a large project. “At today’s prices, the economics for new greenfield projects, particularly in the West, are not supported,” said Albemarle CEO Kent Masters, according to Yahoo Finance. However, he assumes that today’s prices are not sustainable, Masters told analysts in February, according to “Oilprice.com” as part of the balance sheet presentation. Prices are currently “below the operating cash levels of some assets that are currently in operation. And they are definitely below reinvestment levels,” Masters said.

Optimistic forecasts for long-term price developments

Albemarle CEO Kent Masters is not the only one who is confident about future lithium price recoveries. The entire industry seems to be looking ahead with optimism despite the current challenging situation. “As they say in the mining business, ‘The solution to low prices is low prices,'” Piedmont Lithium CEO Keith Phillips is quoted as saying in the company’s press release. “Lithium has been a cyclical business over the last decade, with price lows generally followed by new record highs in the markets. […] With today’s lithium prices and stock valuations, developing new projects is likely to be challenging for everyone, and if electric vehicle markets continue to grow, another period of lithium shortages is likely to follow,” Phillips continued.

As “Yahoo Finance” reports, citing analysts and industry representatives, it is generally assumed that the market for electric cars will recover in the future – especially if the US Federal Reserve begins cutting interest rates later this year. According to the news portal, experts at the investment bank Goldman Sachs expect that around half of global new car sales will be electric cars by 2035. This would also result in increasing or continued demand for lithium.

The postponement of new supply developments in view of low prices is creating the conditions for the next lithium supply crisis later this decade, according to “Oilprice.com”, citing industry executives and analysts. The latter assume that the phase of oversupply and low oil prices will last until 2026 and thus weigh on the lithium price, but in the long term lithium demand will increase. “Maybe we will be closed again in 2027, 2028 [Angebots-]”CRU analyst Frank Nikolic also said confidently to Yahoo Finance.

Editorial team finanzen.net

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