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16 November 2022

Goldman ludicrously suggests Lithium satiation looms

Lithium companies big and small suffered almost unanimous losses Tuesday as Goldman Sachs revised its lithium forecasts for the years ahead and lithium spot prices fell slightly from marginally slowing Chinese EV demand.

The response has been utterly disproportionate, established lithium-focused companies like Albemarle, Pilbara Minerals, and Core Lithium suffered losses between 5% and 15% on the day before, all because EV sales slowed slightly earlier than expected as Chinese EV subsidies approach completion and it clearly doesn’t understand the extent of commodity mining delays.

Goldman’s last prediction covering battery mineral prices in May of this year was effectively laughed out of the room by lithium analysts, where it claimed that a surge in investor capital into supply had created an outsized response that was well ahead of the demand trend. The company predicted that we would have seen peak battery material prices by the 2nd quarter of this year, misjudging lithium volumes by around 88,000 tons for the year and expecting a surplus by the end of 2022, a significant misstep to put it mildly.

While Goldman may be able to see that there is serious interest in lithium, the company seems to have forgotten how long it takes for new commodity operations to output material. Someone should tell Goldman that nine women can’t make a baby in a month. And lithium companies can’t get through planning and environmental procedures with higher investment values, not anywhere reputable at least.

Now Goldman has revised its forecast to predict that battery metal supply shortages will be negated in mid-to-late 2023 with sustained production surpluses to follow. Which once again is far too soon. It claims that slowing EV demand will be a contributing factor to lithium supplies remaining high, but it hasn’t realized that EVs in the West are still largely recession-proof at the moment, and EVs in China will continue to occupy significant proportions of supply as they proliferate into Europe. This reeks of an individual analyst trying to make a name for himself or herself, and missing the mark by a mile.

We’ve seen much of Europe enter difficult economic conditions as a result of Russia’s war in Ukraine sending energy and commodity prices through the roof, but EV demand has persisted across the continent with the exception of Italy which appears to love mild hybrids and never really liked EVs per se. If EVs were already considerably cheaper, then those consumers who are most impacted by inflation would shift into the used market for their next vehicle, but the high prices of EVs have insulated them from the effects of inflation due to the unequal effect that recessionary pressures have on the general population.

Economic inequality is almost always a bad thing, but economic inequality is and continues to be the main driver of EV demand since those unaffected by inflation are still buying EVs in spite of economic conditions. There is an argument to be made that greater equality would have brought costs down sooner through faster innovation arising from larger manufacturing volumes, but supply constraints would have been exacerbated sooner if that was the case. So it’s swings and roundabouts.

We’ve also seen multiple OEMs lowering EV prices and offering incentives in China to compete with more cost-effective options, with Tesla and Mercedes making considerable concessions to stay relevant within the market as this competition opens demand up to wider layers of potential customers.

Lithium security is also becoming a concern, this week the US military expressed interest in investing in Canadian lithium projects. It is able to do this because of President Biden’s invocation of the Defense Production Act in March this year, allowing it to treat investments in allies like Canada similarly to domestic options when funding matters related to national security, including products like batteries and semiconductors.

One could point to NIMBYism as the reason for this, that the military needs its own lithium supplies for manufacturing purposes, but it doesn’t want that raw material extraction to be on home soil. But that’s nonsensical, if anything it’s better to produce it domestically from an economic perspective purely due to job creation and for proximity purposes.

Also, it’s the military making this decision, not the Department of Energy (DoE) who distributes funds from the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law (BIL), implying that this decision is strategic in nature rather than purely economic.

The US military has clarified that its investments are in no way intended to be replacements for private sector funding, claiming that it intends to provide confidence for the private sector through identifying promising projects that might have otherwise struggled to find funding. This will primarily be through grants for companies at varying stages of development.

This isn’t the first time that the US has invested in Canadian mining and refining infrastructure – in 1940 – prior to entering the second world war the US invested in Canadian aluminum production, which led to the creation of a prosperous industry around Quebec.

Last week Canada’s industry minister ordered three Chinese companies to divest from their investments in Canadian lithium extraction projects using national security as grounds for eviction. The Chinese ambassador to Canada has since complained stating this broke international trading laws, he definitely has more grounds for complaints here than he did when complaining about the IRA’s implementation and exclusion of foreign raw materials from subsidy criteria, but nothing has come of that yet.

In a statement following this decision from the Canadian government, Ultra Lithium, one of the affected companies, encouraged the federal government to actively follow through on its commitment to identify and find alternative sources of capital, stating that the decision had harmed its relationship with Chinese investment partners.

The Canadian government’s position here is very clear, Chinese companies of concern will be removed from projects deemed critical for national security, or industrial expansion if you can pass it as the former. This ability of the state to remove investors from a project is a threat to lithium supply within countries with antagonistic geopolitical interaction like the US or its closest allies.

Where these funds originate from is going to be an important factor in the long-term validity of lithium supply agreements, with the potential to threaten production timelines in the near future. The threat of fracturing supply chains and project cancellation should be enough to have confidence that lithium supply isn’t going to satisfy demand any time soon.