Beneath the Surface: Lithium deep dive – Finding clarity amidst complexity

Stable commodity prices are a cornerstone of long-term growth in the mining sector, as they provide greater confidence in valuing strategic opportunities. Such confidence can improve market sentiment and attract capital that may otherwise be deployed in other commodities, markets or industries. 

For lithium, prices have been historically turbulent, with spodumene prices falling from a peak of US$8,000 per tonne in January 2023 to about US$730 per tonne in mid-September 2024¹ , and few are immune to the effects. It has been reported that only one Australian spodumene mine – the Greenbushes mine, a joint venture between US-listed Albemarle, ASX-listed IGO and China’s Tianqi –was profitable at September 2024 spot prices.² While commodities, like most markets, are driven by broader macroeconomic factors including supply and demand, there are certain features particular to lithium which have contributed to the volatility, hindering investment and ultimately stalling growth. A key issue affecting lithium prices that has gained heightened focus of late is the transparency of commodity indices used to benchmark prices in sale contracts, and more broadly in investment agreements (such as offtake prepay agreements). 

In this article, we dive into the issues shaping lithium prices, unpack how price volatility is impeding growth and investment in lithium-related projects and companies, and explore what it would take to improve transparency and stability in lithium pricing.  

Factors affecting lithium prices

Evolving policies and net zero targets

Lithium is now established as critical to the energy transition. The utility of lithium-ion batteries spans a wide field of industries, including personal electronics, electric vehicles (EVs) and energy storage architectures that optimise renewable energy use. Unsurprisingly, international decarbonisation efforts have led to a substantial increase in lithium demand and reliance. The International Energy Agency (IEA) forecasts lithium demand to increase by 60% by 2050 under today’s policy settings, and by 85% under a net zero emissions scenario, due to lithium demand for battery storage rising with increased reliance on clean energy technologies.³

This shift from fossil fuels has created new geopolitical dynamics. The concentration of lithium resources within politically fragile economies may contribute to market uncertainty. Political instabilities may potentially depress⁴ or raise lithium prices.⁵ Accordingly, government policies seeking to incentivise net zero targets have varied greatly between jurisdictions, and in some instances, have involved direct incentives for purchasing EVs. For example, the highly publicised US Inflation Reduction Act introduced by the Biden administration added and expanded tax credits for the purchase of EVs, provided certain requirements were satisfied regarding the origin of battery components.⁶

While policies can influence behaviour and drive economic demand, they are underpinned by the influence of political parties in power – something which is constantly changing within each jurisdiction. These dynamic political attitudes towards the energy transition and targets have some degree of impact on lithium prices, ultimately contributing to price instability and volatility.     

Sources and supply chain constraints

Lithium deposits occur in various forms. The main sources are:

• salar deposits formed from lithium-bearing continental brines;
• hard-rock deposits, predominantly in the form of lithium-rich pegmatites such as spodumene; and 
• volcanic clay-hosted deposits,⁷ which are not yet viable at industrial scales.⁸

Prior to 2018, lithium sourced from salar deposits – primarily those found in South America – dominated lithium supply.⁹ The market has recently shifted in favour of hard-rock lithium, with annual production from hard-rock sources (120kt) exceeding that from brines (70kt).¹⁰ The global distribution of lithium is also limited, with Australia, China and Chile accounting for approximately 90% of global mine production.¹¹ The IEA predicts that this will decrease to about 68% by 2030. 

Rapid development in itself poses risks to price stability, as previous lithium oversupply (following overproduction at peak prices) has significantly reduced spot market prices.¹² Greenfield lithium projects have anecdotally added complications with ramp-up periods and achieving forecasted recovery and production rates. For example, we’ve observed lithium miners’ anticipated recovery drop by over 25% within just a few months. Ramping-up issues are also experienced in brine projects, with the conventional solar evaporation processes taking up to 24 months to optimise recovery.¹³ 

The forecasted lithium product, and delayed ramp-up, directly impacts market supply and broader economic conditions. 

Supply chain constraints

This refining process, also known as converting, is a key consideration in the lithium supply chain as it is necessary to produce a battery grade lithium material (typically lithium hydroxide or lithium carbonate). Refining capabilities and facilities exist in three dominant countries – China, Chile and Argentina.¹⁴ These three countries currently control 96% of refined material production, with China alone controlling 65%. Lithium hydroxide can be directly produced from pegmatites such as spodumene, avoiding the second conversion step required when processing salar lithium carbonate.¹⁵ In a similar manner, the commercial production of lithium batteries from lithium hydroxide or lithium carbonate is also constrained to a number of established battery manufacturers, which are in turn subject to consumer behaviour and broader market conditions. 

For example, Ford announced that its EV division suffered an EBIT loss of US$1.1 billion in Q2 2024, amid ongoing industrywide pricing pressure on first-generation electric vehicles.¹⁶ While Tesla reported a 6% increase in vehicles sold in Q3 2024, it expects to achieve only slight growth in 2024 vehicle deliveries, given the prevailing macroeconomic conditions.

These limitations across the supply chain ultimately place pressure on lithium miners producing brines and pegmatites due to the overarching reliance on countries (and companies) with refining capabilities and facilities, the limited midstream battery producers, and the uncertainties that may arise in production (e.g. logistics, plant throughput, costs related to conversion, among others). These factors can constrain the ability to get battery grade lithium to the market, and ultimately impact pricing stability.

China’s market position 

China’s refining monopoly may also dictate the direction of lithium processing and the activity of the prices on the spot market.¹⁷  Chinese-owned conversion facilities have actively sought vertical integration within the supply chain, for security.¹⁸ The result is that lithium sold as spodumene or carbonate may be subject to non-transparent constraints within the conversion supply chain, in addition to limited tolling capacity. Further, the lithium market dynamics may have a reciprocal impact on the geopolitical environment – there is a demonstrated effect of rising lithium production volumes worsening political conflicts in Chile.¹⁹ Similarly, commentators have opined on how geopolitical tensions between countries may directly impact lithium prices as governments seek to implement tax incentives (or the imposition of trade tariffs) based on location of lithium origination or refining. One example is the US Department of Energy Foreign Entity of Concern requirement, which aims to on-shore and friend-shore the EV supply chain process (discussed further in this HSF Mining Update). The overly concentrated market structure is likely to cause collective market conspiracy and abnormal fluctuations in lithium prices.²⁰ Further, the introduction of tariffs, or exclusion of incentives, can indirectly impact pricing of lithium to OEMs and undermine confidence in pricing models. 

Limitations of existing trading structures

Private contracts

There were no public lithium trading platforms prior to the rapid increase in demand during 2021-22. Trading occurred mainly through private commercial contracts. As it stands, the lithium market continues to be dominated by long-term, bilateral fixed-price contracts.²² These contractual arrangements offer minimal price transparency.²³ 

Spot market indices

There is a recent and increasing adoption of spot market indices to benchmark lithium prices.²⁴ Price Reporting Agencies (PRAs) provide physical spot market price assessments. PRAs collect and assess bid, offer and transacted price information from voluntary (and anonymous) contributors, including consumers, producers and traders. For example, the Platts Lithium Triangle price assessment, launched by S&P Global Commodity Insights on 2 September 2024, is a daily, physical spot market price assessment for South American lithium carbonate. The price is assessed on a free-on-board shipping basis, assuming a minimum quality of 99.0% lithium carbonate, a minimum of five metric tons of power packed in bags, loading 14 to 60 days forward. It is expressed in US dollars per metric ton.²⁵

There are also nascent lithium futures markets. They are potentially interdependent upon the physical spot market, although the mix of hedging and speculation is uncertain.²⁶

Spot market indices are in their infancy. Fixed-price contracts enable secure financing, which is particularly important for lithium juniors. The consequence is that spot market volumes are a small and volatile component of the global lithium pricing structure.²⁷

Digital auction

An emergent approach taken by leading lithium producers is the sale of unallocated lithium via digital auctions. The auctions are typically moderated by an independent software provider and have, variably, enabled producers to secure prices above the spot price. Albemarle’s spodumene concentrate auctions on 26 March 2024 and 24 April 2024, through London Metals Exchange partner Metalshub, secured prices of about US$1,195 per tonne, as against the spot price of about US$1,075 per tonne. ²⁸ On 23 October 2024, Albemarle successfully auctioned 150 tonnes of battery-grade lithium carbonate for about US$10,215 per tonne,²⁹ although this was roughly equivalent to the SMM spot-market indices.³⁰ MinRes announced that it had sold lithium spodumene concentrate at US$1,300 per tonne, being approximately 13% to 20.4% higher than the assessed spot market price.³¹

The democratisation of information through auctions reduces the risks of information asymmetries and may provide greater transparency on spot indices.³² Whilst the success of these offerings should see them increase in popularity, and improved market liquidity, they currently occur infrequently. 

Impeded growth and price instability

The immaturity of the lithium spot market, combined with poor market transparency and limited lithium source distribution, and the intertwined effect of pricing issues, leads to increased price volatility. 

The consequences have been significant and widespread for mining companies, resulting in project development delays, existing operations suspended or placed into care and maintenance, and considerable net losses reported.

Yet, volatility persists in the short-term. The stock prices for lithium companies surged in mid-September 2024, following speculative reports that China’s CATL has suspended lithium lepidolite operations in Jiangxi due to unsustainable operating costs. This is notwithstanding depressed spot market prices.³³

Because spot market volatility makes it difficult to secure investment, having additional liquidity is important to allow flexibility in production rates, in response to market price changes. We are increasingly seeing this play out in lithium joint ventures.³⁴

Sponsors that are not integrated within the supply chain, such as banks or debt providers, have even less insight into price fluctuation. Creating a transparent market which offers greater stability may increase funding opportunities for other lithium players seeking to develop resources. Diversity in the market may increase the information available to PRAs, which itself, in turn, may improve transparency.

Where to from here? 

Improved transparency and alternative pricing platforms

Commentators have suggested that lithium prices may stabilise in 2025,³⁵ however pricing of lithium is complex. It is dictated by geological scarcity, the geopolitical context of upstream and downstream lithium projects, and market speculation.³⁶ While diversification and hedging strategies – such as IGO’s plan to construct a copper division to complement its lithium assets³⁷ – may mitigate volatility, there are strong calls for alternative pricing mechanisms and trading structures.³⁸

There is the option for lithium industry leaders to invest in a collaborative electronic trading platform. The globalOre and globalCoal platforms are useful comparators. In response to opaque pricing mechanisms and volatility, large mining entities agreed to hold a foundational shareholding in the companies hosting these platforms.³⁹ The prices of commodities are normalised to readily comparable headline grades, and full transparency provided as to pre-defined, standardised contractual terms.⁴⁰ Transactors are vetted through licensing or membership requirements. globalCoal maintains a register of licensed entities, which is publicly available.⁴¹

Further, these exchanges report transactions directly to the market to provide certainty.⁴² Both Pilbara Minerals and MinRes have drawn parallels between the instability of lithium spot market and the pre-standardisation iron ore market, and advocate for an analogous collaborative lithium benchmark. It is unclear whether the enthusiasm is shared internationally, as a collaborative pricing model will require Chinese converters to sacrifice pricing power.⁴³ The reality of a collective trading platform remains uncertain. 

Uncontrollable economic forces

The market is likely to benefit from the increased pricing certainty afforded by a shift away from opaque fixed-price contracts and towards digital auctions or a collaborative trading platform. However, the resolution of underlying geopolitical tensions and poor resource distribution are likely to remain fundamental sources of uncertainty in the lithium spot market, of which commercial and governmental actors must remain cognisant. Given the persistent and multifaceted challenges facing the lithium market, the time is ripe for reform. 

Navigating the uncertainty

Navigating the uncertainty in the lithium market requires strategic foresight and proactive measures that consider the supply chain holistically.  As the market grapples with price volatility and opaque pricing mechanisms, the development of a transparent trading platform could be a significant step towards stability. While many of the factors mentioned in this article may be outside the control of a party during negotiations for investments into lithium projects or offtake sale agreements, it is important to consider how to protect your interest under legal documents in this evolving landscape, and understand the various strategies and approaches available to do so.  

Please reach out to discuss how we can support your strategic objectives and navigate the complexities of the lithium market.