Lithium market outlook: Supply disruptions and robust demand point to firm price in Q2

The current lithium carbonate market is being driven by two key factors-intensifying supply-side disruptions and robust demand from the energy storage sector. Supply-side uncertainty has significantly increased due to Zimbabwe's export ban and delays in the resumption of production at China's mines. Simultaneously, downstream production schedules for March show substantial month-on-month growth, providing strong demand support. It is expected that the lithium salt market will continue to destock in Q2, forming a solid price floor. The annual average price is projected to remain within the Yuan 170,000-180,000/tonne, with prices likely to trend upwards in the short term.

I. Supply Side: Mines' accelerated Inventory Clearing, Sequential Recovery in Lithium Salt Production

1.Lithium Mine: Accelerated Inventory Clearing, Intensifying Supply Disruptions

Inventory Clearing: Raw material inventories at 17 lithium salt plants sourcing from external mines continued to be consumed. By the end of February, inventories had dropped to 497,000 tonnes, a decrease of 77,000 tonnes MoM. Meanwhile, inventory coverage days have fallen to approximately 36 days and current inventory levels are only expected to last until mid-to-late April, with inventory pressure set to emerge after mid-April.

Tight Spot Market Availability: Saleable inventories held by lithium ore traders have declined. While actively acquiring material, traders show little willingness to sell at discounted prices, leading to tight availability of ore in the spot market.

Supply Disruptions: Shipping conditions from Zimbabwe remain unclear, introducing policy uncertainty. Although some companies have completed lithium sulfate production lines, their actual capacity still requires observation. Domestically, the timeline for resuming production at the Jianxiawo mine may be further delayed until the end of May, its actual progress requires subsequent follow-up.

2.Lithium Salt: February Maintenance Causes Output Decline; March Production Schedules Show Sharp Rebound

China's lithium carbonate output for February reached 82,500 tonnes, a sequential decrease of 16.2%. In February, spodumene production lines, primarily concentrated in the Sichuan Province, underwent centralized maintenance, leading to lower operating rates. Some lines were shut down entirely during the month, resulting in a significant month-on-month decline in output. However, a few manufacturers maintained high operating rates in February due to received tolling orders. Other producers experienced slight output decreases attributable to CNY holiday.

With the dissipation of holiday disruptions, domestic lithium carbonate production is scheduled at approximately 106,700 tonnes for March, marking a substantial sequential increase of 29.4%. Operating rates for spodumene production lines in Sichuan, Jiangxi, Xinjiang and other regions are expected to increase significantly. Toll manufacturers are projected to maintain high utilization rates due to sufficient order books. The lepidolite segment is expected to see stable operating rates, constrained by limited ore availability.

II. Demand Side: Significant Sequential Increase in Downstream Production Schedules; Sustained Strong Demand for Battery Cells

China's lithium iron phosphate (LFP) output stood at 387,000 tonnes in February, a sequential decrease of 4.53%, primarily impacted by the Chinese New Year (CNY) holiday and production line maintenance. Output is projected to rise to 446,900 tonnes in March, a sequential increase of 15.48%. After the CNY holiday, LFP produces are gradually resuming normal production schedules, with most of them expecting to operate at full capacity in March. Increased shipments from certain projects in Sichuan and Hubei are anticipated, potentially pushing industry production schedules to a record high.

Battery Cell Segment: Leading battery cell manufacturers are continuing to ramp up production on new lines. Production schedules for Q2 are expected to reach new highs, providing strong support for upstream lithium salt demand.

III. Spot Market and Inventory: Downstream Transaction Volumes Shrink; Traders Continue Restocking

The overall trading volumes decreased last week, which was primarily due to the rapid increase in lithium carbonate prices following the Zimbabwe incident. Meanwhile, this exceeded downstream expectations and prevented effective restocking by downstream consumers.

While lithium salt traders are currently continuing to replenish inventories, overall inventory levels are at a moderately low level. Coupled with an increase in the proportion of long-term agreement volumes in March, trader inventory levels are expected to be lower than in January-February.

IV. Outlook: Prices Poised for Upside in Q2; Firm Floor at Yuan 160,000-170,000/t

Supply-Demand Dynamics: With robust demand for lithium salts in Q2 coupled with supply-side disruptions, the market is expected to maintain its destocking trend.

Price Forecast: Prices are anticipated to trend upwards in Q2, with a firm price floor expected in the range of Yuan 160,000-170,000/t. The annual average price is projected to be Yuan 170,000-180,000/t.

Risk Warning: Influenced by macroeconomic news fluctuations related to the US and Iran, as well as supply-side uncertainties such as the delay of production resumption in Zimbabwe and at the Jianxiawo mine, the price ceiling remains difficult to anchor in the short term. It is currently inadvisable to call a top for prices.

Edited by Cassie Li, lixiangying@mysteel.com