The Price is Right: How a Market Is Made

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Dear Reader, Sometimes, even industry experts are very, very wrong. Even the premiere agency in lithium research, Benchmark Minerals Intelligence (BMI). In 2022, BMI predicted rising lithium prices, but the market fell sharply instead. Despite this, BMI still forecasts a lithium shortage by 2025. Within six months, lithium was in freefall. But a year after the initial prediction, BMI doubled down… Predicting a worldwide lithium shortage—coming “as soon as 2025.” Lithium spent the next six months dropping some more, and the industry fell apart. It was so bad that by January 2024, half of the Australian stock market’s top ten shorts were lithium companies and the #1 metals shorted stock on the US exchange is a lithium producer. So, in July 2024, BMI relented to reality, and then some. Now, there would be no return to “the giddy heights of 2022” for lithium within the next decade. Here’s the unfortunate truth BMI’s inaccurate predictions reveal: No one knows what lithium is worth. But that’s to be expected. Because lithium is still a developing market, there’s very little available in terms of accurate pricing. (Note: You can follow the main lithium prices here).   The only certainty right now—as BMI found out the hard way—is volatility. So, we’re not going to predict that the price of lithium is making a huge comeback tomorrow—or even this year. Instead, I’ll tell you that the short-term price of lithium doesn’t matter. What matters is that the lithium market is growing up fast. And the next few years hold two huge developments for the lithium market. As with any maturing market, patient investors could profit immensely as that unfolds. The Price Is (Now) Right There’s a reason no one really knows the true market price of lithium. It’s because the lithium “price” is based on sporadic spot price references and a handful of fledgling futures markets. Together, they’re the equivalent of only being able to see the road every ten minutes while driving. And that’s what’s driven the wild volatility in lithium over the past few years. Here’s a secret… Most lithium sales are based on long-term contracts, so ongoing supply decreases in lithium may not be reflected for years. That further leads to the whipsaw effect on pricing.  Combined, this gives suppliers very little flexibility, miners very little power, and the sales price very little transparency.  “Lithium is early in its life cycle. Frequent, high-quality data points are key to supporting transparent, reliable, and robust price indices.” – Albemarle Just like uranium and iron ore, lithium is undergoing a transformation.  Transparent pricing is emerging through experimental auctions, bringing greater visibility to the market. In early 2024, one of the top lithium suppliers in the world held a series of experimental auctions. Based on their success, Albemarle now plans more—expanding into other types and grades of lithium and to a biweekly frequency.  Visibility into the market is already rapidly improving, and lithium has entered its price discovery era. In March 2024, Pilbara Minerals accepted an offer ahead of a scheduled auction—taking all of the company’s offtake through December.  Given a few more years, however, that may become a thing of the past for lithium. But all of that pale in comparison to the biggest development in lithium: a potential split of the entire market. Free Trade Lithium  The Inflation Reduction Act requires 50% of lithium in EVs to come from U.S. or free-trade countries, excluding China, which processes 65% of the world’s lithium. This creates a two-tiered market: global (Chinese) and premium (American). China also owns mines all across Africa, Australia, and South America. And it processed more than 65% of the world’s lithium—including 98% of Australia’s.  Which means that if you want the tax credit, none of that Chinese lithium can be used in EV batteries sold in the U.S. Put simply… The IRA has effectively set up two tiers of lithium: Global (Chinese price) and Premium (the American price). And premium lithium is in extremely short supply. The United States’ sole lithium mine produces about 1% of the global total.  Yet the annual lithium demand in 2030 for announced gigafactories alone is forty times current U.S. lithium production. By 2033, the U.S. is expected to contribute 5% of global lithium supply—and 23% of demand. So, while there might be no global lithium shortfall anytime soon, massive premium lithium shortfalls are coming. Even foreign manufacturers trying to sell in the U.S. are afraid they will get shut out of supplying the lucrative U.S. market if they can’t find premium lithium. It is still to be seen what the price will be for premium lithium—but this isn’t about the price.  Long-term chart of lithium pricing, especially as spot pricing kicks in, should be up and to the right.  This is about the source.  Miners in the right location—which are exceedingly rare—will have far more competing buyers than which they can supply. And as the price of lithium finds equilibrium, those miners could find surprising amounts of profit. One lithium developer has been quietly expanding its resources during market volatility.  With spodumene deposits highly profitable at $20,000+/tonne, this company is positioned to capitalize on the premium lithium market. They’re just weeks away from publishing their initial resource estimate. This team has an all-in, “go big or go home” mentality. And I’ve put my money where my mouth is. More than 70% of the world’s lithium comes from just ten mines.  Nothing is guaranteed or certain – and fraught with risk. But this company has a shot at being another one of those. Regards, Marin Katusa Copyright © 2024, Katusa Research, All rights reserved. PLEASE READ: RETURNS AND TESTIMONIAL DISCLOSURE  Contact Us | Privacy | Terms & Conditions Details and Disclosures Investing can have large potential rewards, but it can also have large potential risks. You must be aware of the risks and be willing to accept them in order to invest in financial instruments, including stocks, options, and futures. Katusa Research makes every best effort in adhering to publishing exemptions and securities laws. By reading this, you agree to all of the following: You understand this to be an expression of opinions and NOT professional advice. You are solely responsible for the use of any content and hold Katusa Research, and all partners, members, and affiliates harmless in any event or claim. 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