Watch for the coming shakeout in lithium stocks after one of the industry’s biggest producers was given the green light to boost production, thereby ending a long stand-off with its government that has put a lid on output for more than two years.
On Wednesday of last week, Sociedad Quimica y Minera de Chile, or SQM, said it had resolved a long-running dispute with Chile, by reaching agreement to expand production to meet demand from electric cars.
SQM said it would pay $17.5m to Chilean regulator Corfo and agree to pay royalties linked to the price of lithium to settle the dispute, which has hampered its ability to expand over the past three years. In return SQM will be able to produce an extra 349,553 tonnes of lithium until 2030 from the Atacama desert.
The deal solidifies Chile’s dominance in the global lithium market as a key supplier to global carmakers who are ramping up production of electric cars.
The snd-off between SQM and Chile has not only boosted prices, but allowed new mines in Australia to start and expand rapidly. For example Pilbara Minerals last year brought its open cut pit at the Pilgangoora Lithium-Tantalum near Port Hedland into production.
Fears that the New-York-listed company could flood the market with fresh supplies have cast a shadow over the sector.
Shares in Albemarle dropped 8% to $116, while FMC Corp fell 5% to $US89.22. Two years ago they were trading at $50 and $34 respectively. SQM was off 2% at $US58.34. In Australia the shares of a number of producers fell by the close on Friday. Galaxy Resources shares lost 6.6% on Thursday and more on Friday.
Locally listed Orocobre plunged 9.3% to $6.48 on Friday, while Galaxy Resources lost 7.4% to $3.52 and Mineral Resources 6.6% to $18.84. Pilbsra Minerals shed 1.5% on Friday but lost more than 14% over the week
“SQM, the global lowest-cost producer, yesterday got the right to increase 4 to 6 times its annual lithium production quota. We expect SQM to aggressively recover market share from 2020 and see downside risk to the lithium price ,” according to US analysts at Morgan Stanley.
“Negative for global lithium equities,” they added.
Prices for lithium have jumped by over 200% over the last five years as demand from the electric car and battery sectors has outstripped supply.
Those gains and the hype around electric vehicles have driven the share prices of companies like SQM, Albermarle, Pilbara Resources, Galaxy, Orocobre and FMC into the stratosphere.
Analysts at Deutsche Bank said they expected SQM to increase production of lithium carbonate equivalent from an expected 63,000 tonnes in 2019 to 163,000 tonnes by 2024.
"While SQM’s additional volume increases as a result of the license changes announced should not impact the market until 2020, it could impact sentiment in the sector and supports our view that supply options are increasing which should see the market begin to balance by late 2018,” said Deutsche.
Canada’s PotashCorp is selling a 32% stake in SQM – deal that tempted Rio into for a while.