Oversupply to suppress lithium prices

Demand for lithium carbonate increased by approximately 10% from 2013 to 2015, and the demand for power batteries was small. The demand for lithium carbonate in the industrial sector accounts for 70%, which is in sync with the macro economy. The demand for mobile lithium batteries has been growing steadily. The potential of lithium battery market lies in the large-scale application of power batteries and energy storage equipment. In 2015, the production and sales volume of pure electric vehicles and plug-in hybrid vehicles is expected to reach 400,000 units, equivalent to 11,700 tons of lithium carbonate, and the contribution will not be large. It is estimated that the lithium carbonate demand for 2013-2015 will increase by 9.7% year-on-year, with the demand being 165,000 tons, 181,000 tons and 198,000 tons respectively.

In 2014, the global lithium carbonate capacity surplus reached 20,000 tons, and lithium carbonate prices will gradually decline. It is estimated that the global lithium carbonate production capacity will be 168,000 tons, 202,000 tons and 269,000 tons respectively from 2013 to 2015, and there will be an excess of 20,000 tons in 2014. The supply of lithium carbonate is no longer in short supply, and as the new projects are gradually put into production, the prices of the products will gradually decline.

Lithium-extracted companies have the highest cost of lithium, and their cost lines support lithium prices. The industry will maintain the binary supply structure of salt lake ore, and the cost of lithium extracted by outsourced ore producers is the highest. It is estimated that the output will be 50,000 tons in 2014. The industrial marginal cost of industrial grade lithium carbonate is about 33,000 yuan/ton, which may support the lithium carbonate price.

The sale of spodumene in the market is a duopoly pattern. Downstream companies still have room for profit. Spodumene can maintain high prices. First, only Tianqi and Luxiang had short-term sales of spodumene, and the concentrate production capacity was 800,000 tons and 190,000 tons respectively, which was a duopoly pattern. Second, the global demand for spodumene concentrate is expected to be 500,000-5.5 million tons/year, and there will be a surplus supply. However, the production capacity of Luxiang shares is small, and Tianqi did not have the power to fight the price war. Third, current industrial grade lithium carbonate does not include a tax price of approximately RMB 37,000 per ton, and the full cost of outsourced lithium extraction is approximately RMB 33,000/tonne, which still has certain profit margins. Taken together, upstream concentrate suppliers have the ability to maintain high quotations of US$380-390/tonne, while lithium prices are squeezing out profits from downstream outsourcing lithium-raising companies.

Our view of the lithium carbonate industry:

1. 2012 is the high price of lithium carbonate, and the third quarter of 2013 may be a turning point in the profitability of the industry.

2. Sorting of industrial chain: Salt Lake in South America> Picking of spodumene> Domestic salt lake> Lithium processing in the middle reaches.

3, oversupply, prices down suppress the fundamentals of lithium carbonate industry.

Opportunities: 1) The geographical distribution of global lithium carbonate production capacity is concentrated, and climate disasters, delayed supply of new projects cause plateaued investment opportunities for shrinking supply and rising prices of lithium; 2) tight supply of upstream concentrates, optimistic about companies with high-quality mines, including Luxiang shares, Tianqi Lithium and Jiangte Motor.