China has spent the past year or more monstering Australia and Australian companies – from the government to iron ore and wine producers, to barley, beef, lobsters and especially coal – leaving the country now regarded as an unreliable and volatile trading partner.
And yet the ties between both countries continue, especially in the strategically important areas of lithium mining and processing.
It’s a case of need and greed on the part of the Chinese companies and government.
Lithium is not so rare that China has to buy from Australia and deal with local companies. Countries like Chile, Argentina and the US have produced lithium for years – mostly from brines.
Rio Tinto has unearthed a major deposit in Serbia and plans to turn it into a massive mine to produce product for the huge European market.
And yet, despite the current uncertainties with Australia, China still looks to us for raw materials, with lithium a major new area of demand.
Just as with iron ore, that attraction is all about proximity, a stable economy and mining sector here with free markets, plenty of capital and willing risk-takers in business.
Take two announcements from major Chinese companies in the past week or so.
The first means Chinese giant Tianqi Lithium Corp can thank Australian nickel and gold miner IGO for helping the Chinese company produce its first net profit in two years.
Tianqi is one of the world’s top lithium producers, but wouldn’t have been in such a position if it hadn’t been for the $US1.4 billion deal with IGO covering the Greenbushes mine and Kwinana refinery in late 2020.
The deal saw IGO purchase a 49% stake in Tianqi Lithium Energy Australia for $A1.9 billion.
That left IGO with a 25% interest in the Greenbushes lithium mining and processing operation in Western Australia – the largest operating lithium mine in the world. IGO also got interest in Tianqi’s Kwinana lithium hydroxide plant, located south of Perth.
Tianqi said in a recent filing to the Shenzhen Stock Exchange its net income was 85.8 million yuan ($US13.3 million) for the first half of 2021, up from a loss of 696.6 million yuan a year earlier.
Reuters said the result implies a second-quarter profit of 333.7 million yuan, after a 247.9-million-yuan loss in January-March, marking the three months to Tianqi’s best quarterly result since the fourth quarter of 2018.
Tianqi posted seven straight quarterly losses from mid-2019 after a precipitous three-year plunge in lithium prices – mainly driven by oversupply – left the company short of funds and facing default on billions of dollars in loans.
But the December 2020 deal with IGO saved it from collapse, or as Reuters reported it, Tiangqi “secured a $1.4 billion lifeline investment in its Australian operations from IGO Ltd and has been boosted by a near tripling in lithium carbonate prices over the past 12 months as demand from the EV sector roars back.”
First-half revenues were 2.35 billion yuan, Tianqi said in the filing, up 25.13% from a year earlier.
IGO told the ASX earlier this month that it and its partner had produced the first batch of another battery chemical, lithium hydroxide, from the Kwinana plant. Work on that plant was halted for 2020 after Covid hit and that helped put great strain on the Chinese company’s financial position.
IGO said it expects the plant to be producing high-grade battery-quality material early in 2020 once the plant is up and running continuously.
IGO has major interest in nickel, copper and cobalt in WA. It is actively stalking Western Areas (in competition with Andrew Forrest’s Wyloo Metals).
Unlike its rivals, such as Pilbara Resources, IGO has a spread of renewable metals, some of which have a strong conventional user base in the wider economy and will continue to do so for decades to come.
That gives IGO diversification in case China arcs up again over lithium or some other perceived slight. Pilbara doesn’t, but has some big Chinese shareholders to protect it. IGO, though, does have Tianqi.
The second deal has seen Australia (and especially WA’s) proximity to China emerge as a key factor in Hainan Mining, a Chinese iron ore miner, choosing to locate a lithium processing plant in its home province on the country’s southeast coast.
Hainan Mininghas revealed plans to spend $US164 million on a plant to make battery-grade lithium hydroxide using lithium imports from Western Australia.
The company said the project would be located in Dongfang in its home island province of Hainan, in southern China, and would produce 20,000 tonnes a year of lithium hydroxide for use in batteries to be used by Electric Vehicles.
Record-high iron ore prices in the first six months of 2021 saw Hainan Mining’s January-June net profit surge almost 3,000% year-on-year.
“Hainan province is closer to Australia, the main source of spodumene raw material for the project,” the company said in a filing to the Shanghai Stock Exchange last week.
The island “has obvious maritime logistics advantages compared to Jiangxi and Sichuan, the main producers of lithium hydroxide in the mainland,” it said, adding that construction of the project would take 18 months.
Ganfeng Lithium and Tianqi Lithium respectively, two of the world’s top lithium producers are domiciled in China’s landlocked Jiangxi and Sichuan provinces.
As we saw from the first story, Tiangqi can thank IGO and Australia for its survival.
Normally the conjunction of China and a commodity price boom would send shivers through the wallets of investors – just look at the way iron ore prices have plunged since May as China actively undermines to its own benefit – especially if they are from Australia.
And while the current surge in demand for lithium (and cobalt, and nickel, and copper) for batteries would send warning signals because of the enormity of the Chinese market, it’s not the only country in the game.
There’s a shortage of quality lithium product at the moment, as the recent second auction by Pilbara Minerals showed – and prices are running.
US and European giants and their respective governments are stepping up as well. The boom in battery demand is global – not just limited to China as iron ore and coal is.
While batteries for power storage and Tesla have grabbed global attention, demand is greater than that and while Chinese companies at present dominate battery making and demand, that is going to change in coming years as the vast car fleets in the US, Japan, South Korea and Europe are slowly replaced.
Data on new registrations of global passenger electric vehicles (EVs) from Adamas Intelligence confirm that global boom – they jumped by an annual 109% in the first six months of 2021.
In a report entitled State of Change: EVs and Batteries said that 4.16 million new EVs were registered in the first half of this year compared to 1.99 million in the first half of 2020 (which was hit by the first Covid outbreaks).
The US saw a 135% jump, Europe saw a big rise of 124% and Asia Pacific enjoyed an increase of 94% that was boosted by the surge in China’s 200% jump to 1.215 million in the June half.
Adamas pointed out that during the first half of 2021, all newly sold passenger EVs combined amounted to 65,700 tonnes of lithium carbonate equivalent (LCE) deployed onto roads globally, an increase of 155% over the first half of 2020. Of this amount, 51% of LCE units were deployed as carbonate and 49% as hydroxide.
And while China has big numbers, the growth potential in the US, Europe, Japan and other parts of Asia is just as tantalising for lithium companies in Australia who have to understand that unlike iron ore which is just a mine, crush, dump and export business, lithium is more and the value chain is long and potentially profitable.
Given all the spending by US giants like Ford, GM and European car companies like VW, Daimler and BMW, plus the extra spending from French and car makers elsewhere – led by the mighty Toyota – demand for lithium is far more secure than in the last boom which collapsed when China pulled the plug on its first round of subsidies.
China is due to reduce its subsidies for 2022 in December, and that will leave one more year of help for NEV (as China refers to EVs) buyers. Producers here and elsewhere know that this time will be different and if the subsidies disappear in China, demand for batteries of all shapes and sizes won’t.
In its report, Adamas found that Tesla ‘led the sector’ by battery capacity deployed onto roads globally, deploying more watt-hours into newly sold EVs than its six closest competitors combined. Telsa has been a first mover and has the ’name’.
Seven cell suppliers globally (CATL, LG Energy Solution, Panasonic, Samsung SDI, BYD, SK Innovation and CALB) were collectively responsible for more than 90% of all battery capacity and battery metals deployed onto roads globally in passenger EVs in H1 2021.
So Chinese, South Korean (and, increasingly) US battery companies are going to be in the market.
Ambitious companies in Australia in lithium should be looking at not only heading up the value chain to processing, but into some sort of battery making joint venture, just to build learnings for future market moves.
Pilbara Minerals confirmed the sharp rise in prices in its second (innovative) spodumene concentrate digital auction held via its Battery Material Exchange (BMX).
The company said that as with the inaugural auction in late July there was strong interest in both BMX platform participation and bidding within the auction.
Pilbara Minerals said iit intends to accept the highest bid of $US2,240 a dry metric tonne (SC5.5, FOB Port Hedland basis) for the intended 8,000 tonne cargo.
“On a pro rata basis inclusive of freight costs this is approximately equivalent to a price of $USD2,500/dmt (SC6.0, CIF China basis),” Pilbara said.
Pilbara said the bidder is now required to enter into a sales contract with it in the coming days which requires a letter of credit to be presented. Ship loading is expected November.
Given the strong margins yielded through the BMX trading platform to date, Pilbara Minerals expects to channel more concentrate sales through the platform, including concentrate generated from the restart of its Ngungaju processing plant.
The price was more than double the July figure of $US1,250 a dry tonne.
These are early days but an auction and index-based trading system as we have for iron ore and coal, for example, is what will be needed to cement Australia’s powerful position in the market in Asia, and a rapidly evolving processing sector.