By Mark Smith
Chinese demand softened late last year on the realisation that EV subsidies would not be extended. Naturally there will be some withdrawal symptoms, but it's worth remembering that China is a managed economy where demand can be tuned to get the desired effect. If the subsidies are ending, it's probably because organic demand is in decent shape.
- Covid lockdowns added to the gloom, and while the script is now flipped, it may take time for the green shoots of recovery to show. A period of subdued economic activity as the virus makes its unpleasant way through the population can be expected before we see the positive effects of reopening.
- There are also seasonal factors at play. Year-end often sees some balance sheet optimization via destocking of inventories. Chinese markets also traditionally slow down into the lunar new year period as participants sit on the sidelines, waiting for stronger directional signals post-holidays.
- The result is a market that looks and feels sluggish for the time being. Domestic prices are leading the move downward, but seaborne markets are starting to follow. Liquidity has been thin in the Cif Asia markets as buyers wait for offers to drop from sellers viewing this pullback as temporary.
- And it may well be temporary. Fundamentals remain tight and, once past the CNY holiday, consumers should need to restock. On the supply side, hitting presentation-deck timelines is, in many cases, proving predictably difficult.
- The calculation further out is one of relative risks. How you weigh the potential demand impact from worse-than-expected macro conditions, versus the risks of under-performance in the supply response, will largely define your stance as a bull or a bear. The bulls will point to recent history of demand surprising to the upside and supply to the downside. Bears will likely cite Chinese lepidolite expansion as a game-changer.
- The lepidolite story has echoes of the growth of low-grade, high-cost Chinese iron ore supply around the turn of the 2010s; poor quality, environmentally damaging production that has no right being in the market under normal conditions - but everything makes sense at a price. In iron ore such supply dramatically steepened the cost curve and defined the marginal cost for several years. But it left an incentive price lower than the market price, and was gradually displaced by more orthodox supply. That process will likely take longer in lithium though, which is one factor underpinning higher long-term forecasts.
TB Amati Strategic Metals Fund are investors in quality names that will be around long after any short term metal price cycles subside. I strongly believe the price of battery metals will remain above the cost curve for a long time.
The fact that the stocks are pricing in Long term prices lower than the cost of production of low grade lithium feed stock (assumed by analysts) to come on stream needed to create an over supply is academically nonsense. We are patient investors and will add on weakness if justified.
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