Jon Hykawy of Stormcrow Capital: Lithium Market in a ‘Precarious Position’

March 14, 2016

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At this year’s Prospectors & Developers Association of Canada conference (PDAC), Jon Hykawy of Stormcrow Capital provided a brief overview of the critical materials involved in the lithium-ion battery supply chain.

During his talk, he covered everything from the basics of how lithium batteries work to the different types of lithium-ion batteries, to how growing battery demand is affecting the outlooks for various metals.

Certainly, the overall theme of the talk fell in line with what investors have been hearing lately. Demand for lithium-ion batteries is growing quickly, and so is demand for the lithium (and other critical metals) used to make them. However, Hykawy provided a bit more background for that argument, suggesting that lithium supply and demand will only remain balanced under ideal conditions.

Here are a few highlights of what he had to say.


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Supply/demand balance

Lithium demand is currently sitting at about 200,000 tonnes, and Hykawy estimates that if current suppliers were producing at 100 percent of their capacity, supply would stand at roughly 231,000 tonnes.

So why are prices going crazy? “There are some issues with respect to the supply situation in lithium in China,” Hykawy explained, “or the dynamic within the lithium industry within China, which is why, at Battery Japan recently, there were some Chinese buyers trying to find contracts for delivery of certain lithium materials at prices as high as $30,000 a tonne.”

That situation is exclusive to China, but prices have certainly risen markedly for the rest of the world as well as of late.

Looking ahead to 2025, Stormcrow is projecting demand in excess of 400,000 tonnes, with totally supply expected to sit around 425,000 tonnes. That might sound like good news, but as Hykawy noted, “that’s not a big margin of error.”

“There should be some concern about potential lithium supply,” he said.

A precarious position

Of course, whether or not lithium producers will be able to keep up with demand is a key question for those interested in the market. But that can be difficult to predict, since, like other mining companies, lithium producers can be overly optimistic about their projections.

“One way obviously to find out what [a company] can make is to read their literature and determine what they say they can make,” Hykawy stated. “Another is actually to look at their production numbers over the course of years and try and determine what their capacities really are.”

For its part, Stormcrow is expecting a number of new supply sources to come online:

  • Albemarle (NYSE:ALB); “We’re assuming that Albemarle is going to make good on their recent MOU announcement with the government of Chile and that they’re going to ramp that over the course of about a year once they have brine flowing into that part of the project,” Hykawy noted.
  • Orocobre (TSX:ORL); Though a number of other analysts remain hesitant about Orocobre’s progress, Hykawy was positive. “We’re assuming that Orocobre is going to ramp up successfully,” he said.
  • Galaxy Resources (ASX:GXY); “We’ve got Galaxy built in because we think their project is a solid one and will eventually produce,” Hykawy stated.
  • POSCO (NYSE:PKX); “We’ve got some production from Western Lithium (TSX:WLC)/POSCO/Argentina, because that’s probably the most concise way to describe that POSCO has stated goals for their lithium production globally with their process … if they’re right, they’re going to play a very significant role in future lithium production,” noted Hykawy. 
  • Other; More generally, Hykawy stated, “we’re assuming that someone somewhere is going to bring something like RB Energy (OTCMKTS:RBEIF) into production. Now that could be Nemaska Lithium (TSXV:NMX), that could be RB, but somebody’s going to make one of these things work.”

If all of those projections come to fruition, then the market should be in a “perfect supply balance” through 2025.

“That’s a precarious position, having to depend on everyone to get everything right in terms of timing and production and not having any problems occurring year in, year out,” Hykawy said. “It hasn’t happened so far, and you can disagree, but it’s probably not going to happen here.”


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Price predictions

Finally, Hykawy briefly touched on some of Stormcrow’s pricing predictions for lithium.

First, he stressed that lithium prices are difficult to accurately predict based on how fast they are increasing. “They’re rising beyond historical levels relatively quickly,” he explained. “That means you’ve got a statistical model [which means you’re using] extrapolation, and extrapolation is a recipe for error.”

Still, there’s a clear general direction in which lithium prices are heading, and that’s up. “Admittedly, all I can tell you is [that] prices are likely to go in the direction that we’re indicating,” Hykawy said. “If supply doesn’t come on in a particular year, if something is delayed, if there are other factors that increase demand more rapidly than we were projecting, those prices are going to move accordingly.”

More specifically, Stormcrow sees prices for battery-grade lithium carbonate staying around $6,000 per tonne this year. “Now there are some indications that battery-grade carbonate is already above that,” he added. “We think obviously new supply will help bring that down, but we see, moving forwards, prices at $10,000 by 2025.”

For lithium hydroxide, Hykawy stated that “a $7,000, $8,000 price outside of China is not insane at this point,” and that prices could hit $15,000 per tonne moving towards 2025. And, as mentioned above, there were contracts for the material floating around at Battery Japan priced in excess of $20,000 to $30,000.

Interestingly, Hykawy said that skyrocketing prices and a precarious supply/demand balance are not necessarily a bad thing. “If a material is in short supply, [users] have to pay up,” he said. What’s more, he explained that the cost of lithium within a battery is relatively small overall, coming in at “single-digit percentage points typically, based on the chemistry.”

Similarly, Joe Lowry of Global Lithium states in an update on the lithium market that he “[does] not hear much concern about the ~3X price increase” for lithium; rather, the most common themes are “bullishness regarding demand growth and a concern over inadequate lithium supply.”

In any case, Hykawy’s presentation reaffirmed what many lithium market watchers already know: the world is going to need a lot more lithium to meet its growing energy needs.

“Lithium production has to increase,” Hykawy said. “There isn’t any question about that.”


Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: Galaxy Resources and Nemaska Lithium are clients of the Investing News Network. This article is not paid-for content.

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Category: Energy