China lithium: falling prices do not mean falling margins

Lithium prices have slumped. So too have the stocks of Chinese lithium companies. But there is no reason for panic selling. Electric vehicles remain in strong demand. So do the batteries needed to power them.

Prices of lithium carbonate in China have fallen to about $22,900 per tonne, about half their peak in June. That compares with prices hitting a record high of almost $83,600 per tonne in November.

Weaker than expected EV sales growth in China in January was the initial trigger. Investors feared that demand for the metal had peaked. Analysts have forecast the global market deficit of lithium will soon start to shrink.

Shares of the largest local specialist Ganfeng Lithium and peer Tianqi Lithium have plunged about 40 per cent in the past year. Tianqi trades at an enterprise value of just 2 times forward sales, less than half the levels of a year ago.

Yet Ganfeng’s operating margins are little changed from 2022 when lithium prices hit record highs. For Tianqi, they have increased by almost 30 percentage points. The business of mining and producing lithium is lucrative in China, which controls two-thirds of world processing capacity.

Extraction and processing of raw materials has long been a higher margin business than battery manufacturing. Local demand is steady.

EV sales doubled in China last year. Other countries are starting to catch up. Global EV sales rose 49 per cent in the first half of the year, according to Canalys data. China’s lithium demand from the EV sector alone is expected to grow at an annual rate of 20 per cent over the next decade, far outpacing supply.

Fresh discoveries of large lithium deposits and new mine supplies may tip markets into a surplus. China’s EV demand growth is expected to slow this year.

But in the longer term, global demand for lithium for batteries and energy storage systems should put a floor under prices. Until margins start falling at Chinese lithium companies, there is no rush to sell.