The supply additions are coming from both greenfield and brownfield developments.
On the greenfield side, it’s the hard rock projects that are going to be first to market. There are 5 spodumene projects in Australia that will be ramping to full production by the end of 2019. They are already late, but the Market is expecting big supply ramps here late in 2018.
I was surprised the Morgan Stanley report didn’t make more hay out of this than the proposed SQM expansions (which I think are overblown and years away).
Not just Juniors Adding Supply
Big players Albemarle and SQM want to maintain their share too. Both are expected to double their production by 2021. Last month SQM resolved a long-standing dispute with the Chilean government that will allow the company to significantly increase production at its Atacama mine over the next few years.
Both BMO and Morgan Stanley expect SQM and Albemarle to add 200,000 tonnes of lithium to the market by 2025. The other two established producers, FMC and Tianqi, will more then double production by 2025.
I’m not the only one who thought Morgan Stanley’s report was off the mark. Benchmark Intelligence, the leading trade publication in cobalt and lithium, dismissed the Morgan Stanley report findings out of hand.
BMO is expecting supply growth of around 25% per year from 2018 to 2022. They think it’s probable that surpluses will grow to 273 kt LCE by 2021.
The lithium market is a 200,000 tonne market expected to grow to a 350,000 tonne market by 2021. The supply increases being projected by BMO are large compared to the base. While surpluses will shrink post-2021, BMO is still expecting a surplus of over 190,000 tonnes in 2025.
All about Execution
The big question is whether all of these projects will arrive on schedule. History shows that lithium projects are often pushed out months or years from their original completion date.
On their Q4 conference call FMC pointed out that
“almost without fail, the capital cost increase significantly and the start-up dates are pushed further and further back”.
They elaborated more recently saying that delays are often “years not months”.
This may be the Achilles heel to the BMO and Morgan Stanley reports. Producers Orocobre and Albemarle have both had well publicized delays bringing new assets to the Market in the last 2-3 years.
What Happens to the Many Lithium Juniors When Capital Dries Up
Even if it all that new production doesn’t show up on schedule, its still a big backlog. It isn’t good for the early and mid stage projects not yet on the roadmaps.
There are lots of early and mid-stage juniors, mostly in the Golden Triangle (Chile and Argentina) being run by small operators.
These juniors could find that capital funding to get into production could be hard to find—unless demand ramps far fast than BMO expects, or these mines continue to see delays.
How To Play This–Be Very Cautious
The reports make it clear that the setup for cobalt companies is far better than for lithium. Unfortunately, the universe of lithium and cobalt stocks does not line up well with the forecast.
While there are many, many lithium stocks out there, cobalt stocks are few and far between.
I would be wary of any junior without financing or more than a couple years away from production. Those that are closer to a market or that have firm agreements with customers are going to have an advantage.
On the cobalt side—it’s very difficult to find a pure play close enough to production to take advantage of the current bullish fundamentals. There is no such thing as a senior pure play—and almost certainly never will be, being as cobalt is a by-product of nickel and copper.
EDITORS NOTE: I only own two lithium stocks–one with $13 million in the bank, the other with $23 million. I expect the one with $23 million to have news out in the coming weeks that will forever lower the cost of production in the global lithium sector. If you want to find out the symbol of this stock–click HERE.