Australia is on the cusp of a new commodities boom as a lithium exporter, and Chinese investors are well ahead in the race to secure their supply.
As the critical ingredient in next generation battery storage and electric vehicle technologies, global demand for lithium is forecast to grow at a compound rate of 18% in the decade to 2025, according to Macquarie Research.
In 2015, Australia supplied around 36% of the world’s lithium. By 2021, that proportion is forecast to grow to 48% of a much larger global market.
Australian exports of spodumene, the mineral ore containing lithium, have increased 84% in the three years since 2014.
“The increasing demand is a game changer for producers at the higher end of the cost curve in Australia,” explains Patrick Cocquerel, global head of natural resources at Australian bank Westpac.
Cocquerel says that until recently the lithium market was dominated by lower cost products from South America produced in vast salt lakes.
With increased demand and higher prices, exploiting higher quality Australian lithium – secured through open cut mining – has become economic, unleashing new exploration and opening new mines.
The price of processed lithium carbonate in China increased by more than 30% over calendar year 2017. Still, the lithium market is volatile. Speculative investors piled into lithium stocks in 2017 but the expected boom has not arrived, yet.
Shares in several big lithium players were pounded last week on news Chile’s Sociedad Quimica y Minera de Chile, or SQM, one of the world’s biggest producers, may soon receive government permission to more than triple its current level of production.
There is now arguably an oversupply of lithium as miners overproduce at a time global industry leaders are yet to fully develop the battery plants and electric vehicles of the future.
Undeterred, Chinese investors have positioned themselves for the long term in Australia’s lithium industry, not just in mining but in the pre-export processing of spodumene ore.
Australia’s lithium story is part of a rising global race for the commodities needed in next generation technology, comprising not just lithium but also cobalt and nickel.
Chinese companies spent over US$80 billion in 2017 on overseas resources projects, including deals at cobalt mines in the Congo Democratic Republic, home to the world’s largest cobalt reserves.
In securing access to Australia’s lithium, the Chinese are well ahead of investors from other Asian countries such as Japan and South Korea which are also developing lithium-ion battery production.
Westpac’s Patrick Cocquerel points out that unlike Chinese involvement in the iron ore industry, where the raw commodity is simply exported from Australia, Chinese investors are becoming involved in Australia’s value-added lithium supply chain.
Chinese investors are also “pre-buying” their lithium by investing in mines in exchange for offtake deals, where the mines being opened on the back of the deals.
Chinese company Tianqi Lithium has announced an investment of around US$600 million to construct a lithium processing plant in Kwinana, Western Australia.
That plant is currently under construction and when complete will ultimately produce 48,000 tons of battery grade lithium hydroxide each year.
Tianqi is also a shareholder, with US company Talison, in the Greenbushes lithium mine south of Perth, where a US$250 million investment is set to double production.
Last year, Chinese car maker Great Wall paid over US$20 million for a stake in another Australian producer, Pilbara Minerals, becoming the first car maker to secure an off-take agreement.
Japanese auto giant Toyota has followed suit this year, confirming a much larger investment of US$224 million in Orocobre Ltd, an Australian Security Exchange (ASX)-listed lithium producer with interests in Argentina.
Another Chinese company involved in Australia’s lithium industry is Jiangxi Ganfeng Lithium, which has a 25% stake in the Mount Marion mine in Western Australia operated by ASX-listed Mineral Resources.
The fundamentals for lithium demand are compelling. Bloomberg New Energy Finance has forecast that by 2040 more than half of all new car sales and a third of global light duty vehicles will be electric.
China’s electric vehicle industry is already the world’s largest, and Chinese companies are responsible for 25% of the world’s lithium-ion battery supply.
Australia’s recent relationship with China has been built on exporting “old world” commodities in iron ore and coal as part of China’s growth story.
But recent Chinese investments in Australian lithium demonstrate that this close economic relationship is set to continue and thrive in a new era of next generation technologies.