The global lithium-ion battery market is expected to stay oversupplied till 2028 due to a decline in EV production targets in the US and EU, according to Clean Energy Associates’ Q2 2024 ESS Price Forecasting report. An oversupplied market means downward pressure on lithium prices. China has the highest production capacity for lithium-ion batteries, and its dominance in this market is expected to continue despite trade barriers with the US and Europe and America’s push for domestic production.
Section 301 tariffs in the US will lead to cost increases for battery suppliers that undertake more manufacturing inside the country. It is however, unlikely to lead to meaningful contraction in the US market even after duties on natural graphite and non-EV batteries come into effect in 2026.
China is the world's largest producer of lithium-ion batteries, and its oversupply contributes to the global glut. Lithium mines in the Asian nation are sustaining their production targets, despite the price weakness. This is beneficial for battery makers, who are capitalising on the lower cost to continue battery production. Continued production means that the oversupply and weak prices are likely to persist for several years.
Mine operators are continuing production to maintain their market share, sustain relations with governments and prevent technical issues that could arise from closures and re-starts.
The situation is further complicated by the decreased EV production targets in Europe and the US, which is offsetting the rising demand for energy storage systems. Slowing EV adoption has led to these production cuts. The EV penetration rate in the US averaged 6.8% in the first 6 months of 2024, compared to 7.5% in 2023.
Lithium prices in China and North America have converged, with North American lithium no longer enjoying the premium it did in 2023 and the first half of 2024. Analysts now expect lithium carbonate, the preferred choice for batteries used in energy storage, to stay below the $20 per kg mark globally at least through 2027.
It is important to note that China also operates lithium mines in Australia and Africa, which are unlikely to stop production since they are well-integrated into downstream supply chains. Plus, the Chinese government sees its dominance in battery and EV manufacturing as strategic and therefore wants to maintain a steady supply while keeping costs low.
However, the significant decline in lithium prices from their 2022 peak has pushed some companies to close their mines. China, the largest EV market in the world, is expected to intensify its policy support for sales. This could boost demand, and if demand surges, it could outpace supply. The government had doubled its EV subsidies in July 2024, leading to over 5 million cars being sold by mid-December. This, in turn, gave support to lithium prices.
In fact, China's state-owned commodity data provider, Antaike, has predicted that the global supply glut of lithium would shrink from close to 150,000 tonnes in 2024 to 80,000 tonnes in 2025.
If this forecast pans out, prices could stabilise. However, any meaningful price increase could be capped since production can be quickly scaled if it appears profitable. On the other hand, the tariffs imposed by President Trump on imports from China pose a risk to lithium demand.
Among the companies that have made production cuts due to low prices are Albemarle, Liontown Resources and Pilbara Minerals. This has led to the stocks declining, with Abermarle losing over 4% in the month to February 3 and Pilbara Minerals down almost 0.5%. However, Acuity’s AssetIQ widget shows that market sentiment on Pilbara is very bearish, which could indicate further stock price declines.
Meanwhile, Buffett's Berkshire Hathaway Energy Renewables and Occidental Petroleum announced a joint venture in December 2024 to extract lithium from geothermal brine, which could prove to be an environmentally safe way to produce lithium.
In addition, ExxonMobil is all set to begin lithium production by 2027.
The company had unveiled its plans in late 2023 to support the manufacture of over 1 million EVs per year by 2030. Such initiatives are likely to add to the lithium oversupply. Little wonder then that Acuity’s AssetIQ widget shows bearish sentiment towards ExxonMobil’s stock.
On the other hand, market sentiment on EV manufacturers remains bullish. In fact, Tesla Motors’ stock rose despite the company posting disappointing Q4 results on January 31. Elon Musk’s commitment to introduce lower-cost models this year could be one of the reasons boosting optimism regarding EV demand. This bullish sentiment is reflected in Acuity’s AssetIQ widget.
Commodities and stock traders should keep an eye on the markets, since continued oversupply will mean reduced investment in new lithium projects by mining companies. This, along with the oversupply, can create market uncertainty and therefore price volatility.