The price range of lithium carbonate has fallen to a new low. Last Friday (August 2nd), the main contract and spot prices of lithium carbonate futures fell below the 80000 yuan mark simultaneously. The former hit a low of 79600 yuan/ton during trading, breaking a new low since its listing, while the latter's average price was 79500 yuan/ton, also hitting a low in over three years.

The spot price followed the futures price and fell below 80000 yuan, indicating that the situation of oversupply is becoming increasingly severe. Although the trading logic of the futures and spot markets is different, the current price is simultaneously suppressed by high production and high inventory. Last week, there was an increase in positions and a decline in the market, reflecting that the market is dominated by bearish sentiment. In the future, we can only seek opportunities for rebound in peak season expectations and production reduction events.

In the spot market, as the customer to supply ratio continues to rise to 80% -90% and the number of zero order purchases is not high, the spot prices are falling synchronously, reflecting the continuous expansion of the radiation range of excess pressure.

Customer supply refers to the direct purchase of lithium carbonate from lithium salt enterprises by battery factories, which is then processed by material factories. The expansion of the customer to supply ratio also reflects the further differentiation of profits in the upstream and downstream of the lithium battery industry chain in the first half of the year, and the battery factories that control the demand have further gained bargaining power.

On this basis, the boost in demand may drive the rebound of lithium prices, but the extent of the rebound ultimately depends on whether the high inventory suppressed above lithium prices can loosen. The appropriate price of lithium depends on the cost based game between the supply and demand sides.

Furthermore, when this round of lithium price decline will bottom out can be explored from four dimensions.

Firstly, under the influence of multiple factors, the pressure of oversupply continues to intensify.

The lithium carbonate market is currently facing multiple factors, leading to a continuous increase in supply surplus pressure. The situation of oversupply from lithium ore to lithium salt products is continuously evolving.

Firstly, in terms of lithium mining, 2024 coincides with a period of concentrated release of global lithium mining capacity. The main sources of incremental growth include the expansion and production of old projects in Australia, Africa, South American salt lakes, as well as the ramp up of new production capacity in China. Among them, the development of Africa and South America is worth paying attention to.

The production progress of African mines is relatively optimistic. In the first half of 2024, most Chinese funded enterprises have successfully advanced their projects in Africa, such as Huayou Cobalt, Zhongkuang Resources, and Shengxin Lithium Energy, whose overseas concentrate resources have been transported back to domestic factories. Africa has become the second largest source of lithium pyroxene imports for China after Australia.

The production capacity of South American salt lakes is also accelerating. SQM Company's annual production guidance is expected to reach 210000-220000 tons, making it the largest incremental contributor to single projects in South America. In addition, Ganfeng Lithium's South American salt lake project has been put into operation, and it is expected that the lithium carbonate production capacity will increase to 40000 tons in the second half of 2024.

Africa and South America represent high and low-cost lithium mining capacity, respectively. The cost range of lithium mines in Africa is around 70000 to 110000 yuan/ton, and their entry into the market can provide cost support for lithium prices. However, with the improvement of local infrastructure, future costs are expected to decrease.

In contrast, the continued release of low-cost production capacity from South American salt lakes means that the rebound in lithium prices will lack sustained support. Due to the considerable production capacity of salt lakes in China, it is expected that African lithium mines will have a significant impact on domestic lithium salt production.

Based on the continuous increase in supply, the overall price of lithium ore, including imported spodumene and domestic mica, has fallen to the lowest level of the year, further opening up a downward channel for lithium prices.

Recently, the latest auction price of Australian mines was less than $760/ton, which translates to a price of around 73000-75000 yuan/ton for lithium carbonate, lowering market expectations for the price of lithium carbonate. With the continuous decline in lithium carbonate prices, the willingness of overseas miners to raise prices has weakened, and some miners have begun to lower their quotes.

However, despite the continuous decline in lithium ore prices, lithium salt companies have not engaged in large-scale production cuts or shutdowns. On the contrary, some leading enterprises are still expanding production and accelerating technological transformation to reduce costs and increase efficiency.

On the one hand, lithium carbonate production has a strong seasonal cycle. Currently, it is the peak season for summer production, especially in the second quarter when salt lake projects enter the seasonal peak production period.

On the other hand, most lithium salt companies still have a certain profit margin. During the first half of 2024 from March to May, the futures market provided profit opportunities for hedging, and many lithium salt factories and traders maintained production by locking in profits in the futures market, which is currently being continuously released. Furthermore, due to the lucrative profits in the industry in recent years, enterprises still possess strong resilience against losses.

According to the latest data, although the operating rate of lithium salts has declined recently, market feedback shows that this is mainly due to the commissioning of new projects, and in fact, the competitive landscape of the lithium salt industry is further deteriorating.

Taking into account the above factors, it is expected that the monthly production of lithium carbonate will maintain a positive growth trend, and the pressure of oversupply will continue to intensify.

Secondly, high inventory levels are difficult to clear, suppressing the rebound of lithium prices.

At present, the total inventory of lithium carbonate has exceeded 120000 tons. Although social inventory is still mainly concentrated in the smelting process, it is worth noting that the inventory of lithium carbonate in material factories is higher than the same period in previous years, indicating that the willingness of material factories to replenish inventory is not high and the channels for digesting lithium carbonate inventory are not smooth.

In addition, the warehouse receipt inventory has exceeded 35000 tons. Each time the warehouse receipts are cancelled, a large amount of outdated goods flow into the market, and these goods can only be sold at a significant discount, further suppressing spot prices.

Thirdly, the expectation of peak season is fluctuating, and trade in and energy storage are expected to open up incremental opportunities.

In terms of demand, the performance of the terminal new energy vehicle market in the first half of 2024 was relatively flat. Although lithium prices have dropped from 110000 yuan/ton to 80000 yuan/ton, coupled with the benefits brought by the price war, the penetration rate and structure of new energy vehicles have fallen into a phase bottleneck.

The market growth rate is mainly driven by hybrid models, with small battery plug-in hybrid models being the main drivers, resulting in a decrease in average single vehicle charge and limited demand for batteries. Market data shows that the production schedule of battery factories in August 2024 is basically the same as that in July, with limited demand growth.

However, looking at the future, there are still some positive factors worth paying attention to. In terms of inventory, data shows that battery inventory pressure has slowed down, which means that the response to boosting terminal demand will be more timely and sensitive. In addition, with the intensification of the trade in policy, there may be an additional increase in battery demand.

The field of energy storage also shows positive prospects. Previously, the market was generally concerned that low energy storage utilization would affect the subsequent release of demand. However, in the first half of 2024, the energy storage utilization rate will significantly increase, which is expected to stimulate further release of energy storage demand.

In addition, the economic viability of domestic industrial and commercial energy storage has improved, coupled with high growth in demand from overseas energy storage markets such as the United States, the global installed capacity of energy storage is expected to further increase. It is worth noting the incremental demand brought about by the structural transformation of household energy storage to large-scale energy storage and industrial and commercial energy storage.

Fourthly, top mining companies are reducing production or curbing the downward trend of lithium prices, but the clearance of production capacity is not yet clear.

At present, the lithium price of 80000 yuan/ton has successively broken through the cash costs of foreign mining and smelting enterprises and domestic integrated pyroxene/mica salt plants. However, what is more worth paying attention to is whether the decline in lithium prices can be transmitted upstream, and whether the supply and demand pattern can be improved or even reversed through the reduction of production at the source mining end.

From a trend perspective, research shows that Australian mining companies will consider suspending production when the ore price is below $700/ton (corresponding to lithium carbonate prices ranging from 75000 to 80000 yuan/ton).

From specific events, the world's largest lithium miner, Yabao, incurred a net loss of $188 million in the second quarter of 2024, a significant decline from its net profit of $650 million in the same period last year, transitioning from profit to loss. The company has announced that it will terminate its expansion plan for the Kemerton lithium hydroxide plant in Australia and reduce its existing production capacity from 50000 tons to 25000 tons.

In the field of lithium salts, external mining and low-grade lithium extraction enterprises will gradually cease production as the cost inversion deepens, but it should be noted that their impact on the overall supply scale may be limited. At the current lithium price of 80000 yuan/ton, market institutions still predict a surplus of 190000-250000 tons of lithium carbonate in 2024.

Overall, to effectively clear excess lithium carbonate production capacity, lower and more sustainable price levels may be needed.

According to some institutions' calculations, the critical point of this "low price" may drop to the 75th percentile of the global lithium resource cost curve, which is around 65000 yuan/ton. The institution believes that only when market prices remain below this level for a long time can it trigger large-scale production cuts in mines, thereby reversing the current supply-demand imbalance.