What’s Behind China’s Lithium Rush?
When the price of lithium soared to around 600,000 yuan ($81,900) a ton last year, mining companies were rubbing their hands. At the same time, an unprecedented slump in the lucrative lithium-ion battery industry had downstream manufacturers wringing theirs.
Even China’s leading vehicle battery maker, Contemporary Amperex Technology Co. Ltd., found itself at the mercy of the mines producing this essential metal, which has multiple industrial applications.
At its core, the so-called supercycle for lithium resulted from an imbalance in supply and demand. However, the financial dilemma faced by battery companies and automakers was undoubtedly exacerbated by speculative price hikes and bidding wars overseas. CATL, which benefits from a greater degree of negotiating power than its rivals, reported negative net profit growth in the first quarter of 2022.
Following a surge that lasted several months, the price of lithium then suddenly nosedived. This meant that after expanding production multiple times, China’s vehicle battery manufacturers faced massive surpluses and severe product similarity. Since the start of 2023, the cost of lithium carbonate has dropped back to previous levels. On Aug. 24, the spot price of domestic battery-grade lithium was 220,000 yuan a ton, down 22.8% on the previous month and a 62.7% decrease from the peak of 591,000 yuan a ton in November.
Industry insiders believed that the scales had been tipped back in favor of battery manufacturers, yet they were caught off-guard again recently when the prospecting rights for two mines in the southwestern Sichuan province fetched staggering sums at auction.
China’s lithium rush looks far from over, and it has left many people scratching their heads: Why would companies be vying for lithium during a slump in prices? Is hoarding and speculation still a risk-free strategy for mine owners? And will they again raise prices at the expense of downstream buyers?
In the early hours of Aug. 13, the prospecting rights to the Jiada Lithium Mine in Barkam, Sichuan, were sold after an intensely competitive bidding process lasting three days and three nights. In all, numerous listed companies raised their paddle 11,307 times.
Dazhong New Energy, a subsidiary of Inner Mongolia Dazhong Mining, eventually emerged victorious with an eye-watering closing bid of 4.2 billion yuan. The hammer price was 1,317 times higher than the starting bid of 3.19 million yuan.
Remarkably, this auction was not unprecedented. On Aug. 11, after 3,412 bids, the prospecting rights for the Lijiagou North Lithium Mine in Jinchuan County, some 150 kilometers from Jiada, were sold to Sichuan Energy Investment Capital for 1.01 billion yuan — 1,771 times the starting bid of 570,000 yuan.
China’s domestic lithium salt market is still in decline, and it is widely believed within the industry that supply will outweigh demand long into the future. So for many people the intensity of the two auctions in Sichuan and their large closing bids came as a surprise.
To safeguard production stability, automakers began last year to increase their battery stocks, providing manufacturers with an abundance of orders. Now that prices for materials have fallen, some have cancelled those orders while others are still working through their reserves. This has only worsened the product surplus problem facing battery manufacturers.
From January to July, the total output of domestically produced vehicle batteries was 354.6 gigawatt-hours while the total installed volume was 184.4 GWh, according to the China Alliance for Vehicle Battery Industry Innovation. Even after subtracting 67.1 GWh for exports, that leaves 103.1 GWh of unused stock.
Meanwhile, Huatai Securities has predicted that the global surplus of lithium will rise from 70,000 tons in 2023 (7% of the annual demand) to 250,000 tons in 2024 (17%) and 310,000 tons in 2025 (16%). Ouyang Minggao, a professor at Tsinghua University’s School of Vehicle and Mobility and a member of the Chinese Academy of Sciences, estimates that, by 2025, the output of China’s vehicle battery industry could reach 3,000 GWh, compared with a shipment volume of only 1,200 GWh.
China, Japan, the United States, the European Union, and Australia have all listed lithium as a strategic resource. “Lithium will always be valuable as a resource,” says Zhao Yong, CEO of Saidemei, an environmental protection technology company. He points out that China is the world’s largest consumer of lithium resources, yet it is 80% dependent on imports. This heavy reliance on the global market creates uncertainties when it comes to ensuring the nation’s lithium supply.
Global lithium resources are concentrated in South American countries and Australia. Those mineral-rich nations have been accused of deliberately closing the door to free trade in the interest of maintaining a monopoly on lithium and selling it at exorbitant prices. As the risks involved in investing in foreign mining escalates, Chinese companies have sought to satisfy their demand using domestic resources. Unfortunately for them, the best lithium resources in China have long been snatched up by industry giants. This sense of scarcity, combined with the overall positive long-term growth trend for the lithium market, has led to a frenzy surrounding the handful of mines whose prospecting rights are still up for grabs.
Last year, China’s electric vehicle companies struggled to make profits because of the soaring prices of raw materials upstream. For a while, it was widely believed that battery manufacturers had unfairly seized most of the profits, with some people downstream going so far as to say that automakers are “at the mercy” of CATL. In reality, “both anode material factories and battery manufacturers are just moving goods downstream — those who are truly reaping the benefits are the mining moguls at the top of the food chain,” says Xia Yonggao, a researcher at the Ningbo Institute of Materials, which is affiliated to the Chinese Academy of Sciences.
According to a downstream industry insider, the buying up of prospecting rights is driven by two key factors: Owning these rights provides a much-needed sense of security to companies afraid of yet again falling victim to price-gouging, and it also provides an opportunity to engage in exploitative pricing themselves. “That’s why even the giants of battery manufacturing such as CATL want to invest in mining,” the insider says.
In April 2022, CATL purchased the prospecting rights to a lithium mine in Yichun, in the eastern province of Jiangxi, for 865 million yuan. Records available on the enterprise database Tianyancha show that, on July 11 this year, CATL also founded the indirect wholly owned subsidiary Barkam Times Mining Co. in Barkam, Sichuan, with a registered capital of 300 million yuan. Market analysts suggest that this company may have been a major player in the bidding war for the Jiada mine.
“The main goal for companies wanting to purchase mining rights is to decrease their costs. If China were 100% self-reliant in terms of lithium, it would cost only 70,000 to 80,000 yuan per ton. The benefits are obvious when compared to relying on imports,” says Qian Yi, a researcher at icbattery, a website focusing on lithium battery trading information.
Several comprehensive geological surveys have uncovered a wealth of lithium resources in China. Qian says that China has about 1.5 million tons of lithium, relatively little compared with how much it consumes, and that these resources are scattered throughout the country. When it comes to hard-rock mining for lithium ore, spodumene mines in Sichuan and lepidolite mines in Jiangxi have great potential for excavation, which could contribute to safeguarding the domestic supply, he adds.
There have been other instances when the rights to domestic lithium mines have sold for hundreds of times over the starting price.
After being listed for sale in February, the rights to a lithium prospecting zone in Waxxari, in the Xinjiang Uygur Autonomous Region, were purchased by Xinjiang Zhite New Materials for more than 6 billion yuan, about 385 times the starting bid of 15.81 million yuan.
Soon after, listed companies went head-to-head to acquire and restructure the bankrupt mining outfit Sinuowei. Following several months of fierce bidding, CATL emerged victorious, purchasing all stock in the company for 6.4 billion yuan, 1,900 times the starting price of 3.35 million yuan.
Industry experts have expressed concern that, as investors eye lithium mines as an increasingly lucrative venture, this could lead to the creation of artificial scarcity in the interests of boosting prices. Zhang Ting, an associate at Dafayang Law Firm in the Inner Mongolia Autonomous Region, says that price-gouging behaviors may break the law and that those who engage in them may face legal consequences.
Right now, the domestic market for mines is flexible, with properties being traded through listings, auctions, and direct transactions. By comparison, Chinese state-owned mining companies operating overseas must carry out lengthy negotiations and planning before signing long-term collaborative agreements with local authorities, which generally include more complicated conditions than those signed in China. In other words, the domestic mode places a greater emphasis on market mechanisms and flexibility while the overseas mode favors long-term supply relations and stability.
It should be noted that it was only the lithium prospecting rights that went under the hammer in the two recent auctions in Sichuan. Zhang explains that there are two types of rights in the mining industry — prospecting rights and mining rights — and acquiring the former does not necessarily grant the latter. Under the existing laws and regulations, all mining resources are the property of the state. Owning prospecting rights means that a company can carry out activities within a determined zone and has priority regarding the acquisition of the mining rights for any mineral resources it discovers. However, despite this priority, there is no guarantee of how much ore a company will find, if any at all.
A survey and assessment report released by the Sichuan Bureau of Geology and Mineral Resources showed that lithium oxide deposits in the two Sichuan prospecting zones have an estimated average grade of 1.26% and a predicted volume of 370,000 to 600,000 tons, which translates into 920,000 to 1.48 million tons of lithium carbonate. On this basis, the report concludes that the zones have “huge” potential as spodumene mines.
As for whether these acquisitions are worth the expense, one vehicle battery expert believes that, in the current circumstances with lithium carbonate costing 200,000 yuan a ton, profit margins will be determined by the size of lithium reserves and the rate of extraction.
“For the Jiada mine, 4.2 billion yuan isn’t all that much to pay,” says the expert, who attributes the headline-grabbing hammer price at auction to a relatively high degree of certainty regarding the grade and volume of extractable lithium in the prospecting zone. It is for that reason the company was willing to redirect funds that it would otherwise have used to purchase mining rights.
However, even for a hot asset like a lithium mine, most companies would consider shelling out billions of yuan a risky move. A notice on the Sichuan Public Resources Exchange website says the prospecting rights for the Barkam Jiada Lithium Mine will expire in five years, with the money to be paid upfront in a single transaction.
Since the auction, there has been speculation whether Dazhong Mining will be able to make such a massive payment in one installment. Some suggest that such companies could be biting off more than they can chew.
Dazhong expanded into the lithium-ion arena only last year. Previously, the company was mainly involved in iron ore separation, and the production and sale of iron powder, iron pellets, and manufactured sand. According to its half-yearly report, Dazhong has 1.35 billion yuan in currency, and its net cash flow for the first half of 2023 was 206 million yuan, down 70.99% compared with the same period last year.
Dazhong began to invest heavily in lithium in October, announcing that it had joined several other downstream companies in signing a memorandum of collaboration with the government of Linwu County, in Chenzhou, Hunan province. The agreement involved a pledge to invest in a large-scale project to extract lithium and other metals at an open mine, processing 40,000 tons of lithium carbonate a year, and the production of rechargeable batteries. The project is forecast to attract 16 billion yuan in investments.
Law firm associate Zhang says that, while the dramatic lithium price fluctuations in recent years have not led to many collaborative agreements being torn up, there have been a considerable number of lawsuits. In the event of an agreement being dissolved, the parties can draw up another contract in which the conditions are better adapted to the current market environment. And if their negotiations prove unsuccessful, they can apply for arbitration or file legal proceedings. Regardless of what route they take, Zhang says, all parties should do their best to communicate and cooperate, and aim for a mutually beneficial solution. Plus, in anticipation of such an event, they should consider establishing conditions for the agreement’s termination before signing it.
As electric vehicle sales and energy storage needs expand in China, so too will the demand among downstream companies for lithium. To secure supplies, some may continue to purchase mining resources in order to have control over the availability and cost of raw materials.
However, industry insiders believe that the recent auctions in Sichuan will not have a major impact on the balance of supply and demand in the next couple of years. Domestic companies that long for greater self-sufficiency in terms of lithium, and with it protection against fluctuating prices, will therefore need to arm themselves with patience.
Reported by Bao Xiaoqian.
A version of this article originally appeared in Hu Xiu. It has been translated and edited for brevity and clarity, and is republished here with permission.
Translator: Lewis Wright; editors: Xue Ni and Craig McIntosh.
(Header image: Bloomberg Creative Photos/VCG)