Lithium price: Australian merger activity belies the long-term future

Lithium market dynamics

While there is no official lithium price — with the critical mineral instead regarded by the markets as a non-fungible specialty chemical — the price commanded by the metal in Chinese markets has fallen sharply in 2023 to below CNY 165,000 per tonne.

Arguably, this price fall is due to a relatively weak economic outlook for China, alongside electric vehicle (EV) inventory supply gluts caused by subsidies offered by the Chinese government during the pandemic era.

Industry analyst downgrades and EV demand

Analysts remain divided on the long-term outlook for lithium; positively, Fitch Solutions research unit BMI still considers that ‘global lithium supply is expected to enter a deficit relative to demand by 2025,’ but corporate activity may appear unencouraging at present.

UBS analysts have just downgraded the world’s largest lithium miner, Albemarle, from ‘buy’ to ‘neutral’ due to falling lithium prices and reduced EV demand. Both Ford and General Motors are scaling back their EV plans, while Tesla CEO Elon Musk is reportedly considering developing a much more affordable EV for the mass market.

And both Albemarle and Livent have recently downgraded earnings guidance. But merger activity continues apace in Australia — indicating that the longer-term picture remains bright.

Lithium price: merger activity

Paul Graves — who will be CEO of the Allkem-Livent tie-up, Arcadium Lithium — has already warned he will soon get ‘aggressive’ on acquiring Western Australian lithium assets. However, he argues there is a ‘massive disconnect’ between the paper and real values of early-stage assets in the country, making it ‘a little challenging’ to know how the M&A market will play out.

Meanwhile, Azure Minerals Azure Minerals — which owns 60% of the Andover lithium project — is surging as Mineral Resources’ Chris Ellison and Gina Rinehart’s Hancock Prospecting announced they had built up stakes of 12.3% and 18.9% in the ASX lithium stock, respectively. Lithium titan SQM currently holds 19.9% of the company and has been planning a takeover.

For context, SQM’s takeover bid was at AUD 3.52 per share, and the stock is now changing hands for AUD 3.87.

The Albemarle strategy shift

Of course, Rinehart was also at least partially responsible for the collapse of Albemarle’s AUD 4.2 billion takeover of Liontown Resources. And Albemarle now considers that it could lose market share to Chinese companies after revealing a strategic review which essentially involves reducing capital expenditure during these weaker market conditions.

CEO Kent Masters notes that the company is ‘being a little more cautious,’ and that this will ‘probably be helpful for Chinese suppliers.’ For context, Albemarle holds circa 13% of the global lithium market share, compared to a combined 63% for Chinese-listed businesses.

This scale-back highlights the growing catch-22 facing Western lithium companies — they often cannot invest enough when cash flows drop, so lose market share to China — and therefore also miss out on the gains when the markets turn.

Albemarle still believes that global demand could quadruple by 2030, but in Q3 results, net income fell by 65% to USD 302.5 million, and it also substantially cut its annual sales growth forecast.

Future of ASX lithium mergers

It’s worth noting that Albemarle now expects net sales to rise by between 30% and 35% year-over-year, far lower than previous guidance. Less lithium entering the market could help to support prices over the medium term, even given the current supply glut.

But while major EV manufacturers are being more cautious, the ASX lithium market will now have Rinehart, Ellison, and Graves all searching for the best merger opportunities — underpinning a perhaps more positive outlook than current pricing might suggest.