Why lithium prices may never recover

Lithium prices are not expected to rebound to the euphoric levels observed in late 2022, at any time between now and the end of 2029, according to the Department of Industry and Resources.

In 2023, a rush of investment in lithium production followed the high prices of 2022, driving a significant global supply surge. However, weaker-than-expected demand for electric vehicles in the US and Europe balanced the market and sharply lowered prices.

"The fall in prices over 2023 has driven a reduction in production (particularly by some high-cost producers). This is likely to support a modest recovery in the lithium prices over 2024 and 2025," according to the latest Department of Industry, Resources and Sciences' March quarter report.

"From 2026, alternate battery chemistries could place some price pressure on lithium-ion EV batteries, resulting in a fall in lithium prices for the rest of the outlook period."

The forecasts expect lithium spodumene prices to rise to US$1,360 a tonne by 2026 before falling to US$1,090 by 2029.

Key takeaways

I've read the Department of Industry, Resources and Sciences' quarterly report for several years. In my experience, they lean towards conservative forecasts but generally prove to be directionally accurate, barring unexpected developments. Much like a broker note that might include an ambitious share price target, the forecasts and models are crucial. We'll recap some key numbers and charts from the report below.

China EV adoption soars but other markets fall short: China's EV penetration soared 9.5 percentage points, to more than 35% in 2023. Growth in the US and Europe was lower than expected due to initially high prices, rising interest rates, lack of charging infrastructure and concerns over vehicle range. EV sales in Europe's passenger vehicle market rose just 0.8 percentage points to 22% in 2023. The US is lagging other markets globally, with data showing EV inventories growing to 114 days of supply in November 2023, up from 53 a year prior.

Source: Department of Industry, Resources and Sciences

Lithium demand higher but there are plenty of downside risks: The report expects lithium consumption to rise 16% per annum to 2.3 million tonnes in 2029. "Demand from EVs is expected to drive the bulk of this demand ... This forecast is presented with a substantial risk to the downside: EV adoption faces challenges ranging from rising trade barriers and supply chain concerns ... and lithium is in competition with other materials," the report says. Some emerging technologies that could reduce lithium usage in batteries include lithium manganese iron phosphate batteries (which use less lithium) and sodium-ion batteries.

Source: Department of Industry, Resources and Sciences

Australia's share of lithium production to fall: Global lithium output rose 44% year-on-year in 2023, to 993,000 tonnes of lithium carbonate equivalent. Australia accounted for 46% of global output in 2023 and projected to add more lithium output than any other country between 2023 and 2029. However, a strong rise in production from other countries such as China, Zimbabwe and Argentina will ease Australia's share of global output to 32% by 2029.

Prices to increase over the next three years: The report expects spodumene prices to gradually increase over the next three years to US$1,360 a tonne by 2026. "The forecasts have a high degree of uncertainty, as new producers enter the market around the world and uneven trends in EV demand growth. Lithium prices could respond to unexpected developments in the pace of EV adoption and in other emerging uses, changes in battery technology and government policy, over the outlook period," the report warns.

Source: Department of Industry, Resources and Sciences

Food for thought

If lithium prices are forecast to recover only gradually. Then what does that mean for local producers?

The table below implies most large cap producers, including Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN) and IGO (ASX: IGO), remain profitable at current prices.

Source: Department of Industry, Resources and Sciences

But how would things look for marginal producers like Core Lithium (ASX: CXO)? Is US$1,000 to US$1,300 a tonne enough to get its Finniss Project out of care and maintenance?

And what about the up-and-coming Liontown (ASX: LTR)? The latest Citi note (13 March) forecasts FOB cash costs of US$963 a tonne in 2025, which will then improve to US$542 a tonne in 2026.