Lithium price - just a correction or something more? 

Benchmark lithium prices have increased almost nine-fold in recent years. However, the red-hot lithium market could face a more significant slowdown. The current sales of electric vehicles by automakers will not be enough to absorb the abundant supply in the market, even with China reopening. Analysts think so Goldman Sachs. Goldman expects strong supply growth from major lithium suppliers this year, with Australia and China projected to add up to 175 kilotons of lithium carbonate equivalent to the market. While demand from the auto industry is expected to increase to 200 kt LCE, the market will also face a 94 kt drop in replenishment demand this year due to increasing overcapacity and slower demand growth.

Lithium prices are starting to fall

Lithium carbonate spot prices in China, the world's largest market for electric vehicles and a major consumer of the commodity, have been rising since 2021, peaking in November 2023 at around $90 per tonne. In the last two months, however, prices have fallen by around 000% from that peak. Benchmark Mineral Intelligence's Lithium Price Index is down 30% this year, but is still up 7,4% year-on-year. The index is linked to the weighted average price of lithium carbonate and hydroxide, the two main lithium chemicals.

Is a price war looming in the lithium battery market?

The news that one of the world's major producers of lithium batteries, Contemporary Amperex Technology (CATL), reconsidering its pricing strategy, has seen shares of lithium producers including Albemarle, Livent and Piedemont Lithium plummet in recent weeks. In short, CATL's comments can be summarized as CATL plans to sell some of its batteries at a significant discount to spot prices. One of the reasons CATL can actually discount is because it mines some of its own lithium. Basically, CATL accepts lower mining revenues to sell more batteries.

Initial information indicates that CATL plans to price its batteries based on the price of lithium, with 50% of batteries priced as lithium carbonate, the reference price for lithium products, at 200 yuan per ton, or about $000. For other batteries, the spot market price for lithium carbonate is used.

Spot prices are now 428 yuan per tonne, or about $000, and have increased about nine-fold in recent years as rising demand for electric vehicles has strained the global lithium supply chain. CATL's move means a big cut in battery prices. While this cuts into profit margins, it gives CATL an edge over other battery makers.

Car manufacturers also want to lower prices

CATL's move to rethink or adjust its pricing strategy is significant, but it's not yet clear if investors have drawn the right conclusions. The decision could even mean greater risk for battery and electric vehicle makers like Tesla. In fact, so far only lithium mining companies have been punished or seen as losers.

The pricing strategy seems destined to hurt the profits of battery makers and mining companies, and will help the carmakers' profits somewhat - although the oversupply in China's electric car industry could mean that lower battery costs will be fully passed on to consumers.

Tesla has already lowered the prices of some of its models in early 2023 to spur demand.

Investors know the competition is heating up. It is not clear whether CATL's pricing strategy will hurt lithium producers. In addition, the price of 200 yuan ($000) per metric ton is $30 higher than proposed by market leader Albemarle in January to ensure long-term lithium supplies for the automotive industry. By these standards, the CATL movement looks positive for lithium miners. Investors may come to that conclusion over time if the demand for electric vehicles is indeed as high as currently believed. However, if consumers have a different opinion, there is a risk of further declines in share prices here as well.