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Author: Big Brother, Editor: Xiaoshimei

For strong cyclical industries, violent cyclical fluctuations and long cyclical winters are often excellent opportunities for lagging companies to reverse the trend and overtake others. The historical experience of industries such as pig farming and photovoltaics has witnessed this miracle many times.

Today, the same story is playing out in the lithium carbonate industry. The sharp rise and fall of lithium prices in the past few years is reshaping the competitive landscape of the lithium carbonate industry. The old king has not fallen, and the new king has already taken the throne.

【Lithium King Transposition】

From 2020 to 2022, China's new energy industry, represented by electric vehicles, ushered in the fastest growth period, and the demand for upstream lithium resources increased far more than the production capacity supply at that time. Under the mismatch between supply and demand, the price of lithium carbonate rose from 40,000 per ton to more than 600,000, a 15-fold increase.

At that time, the industry leader was Ganfeng Lithium. In 2022, the company shipped 97,000 tons of lithium carbonate, and its market value peaked at more than 310 billion yuan. Following closely behind was Tianqi Lithium, with lithium carbonate shipments of about 50,000 tons and a market value of more than 240 billion yuan. Salt Lake shares shipped less than 40,000 tons and ranked third with a market value of more than 230 billion yuan.

During the industry's growth period, shipment volume and the resulting revenue scale have become key factors for lithium carbonate companies to gain capital favor.

After 2023, lithium carbonate ushered in the most tragic decline in history. The price of battery-grade lithium carbonate fell from 517,500 yuan/ton at the beginning of the year to 97,000 yuan/ton, with an average price of 262,800 yuan/ton for the whole year, a drop of 81.25%.

The lithium mining giants are naturally not doing as well as before. In 2023, Ganfeng Lithium's revenue was 32.972 billion yuan, a year-on-year decrease of 21.16%; Tianqi Lithium's revenue was 40.5 billion yuan, a slight increase of 0.13% year-on-year; and Salt Lake's revenue was 21.579 billion yuan, a year-on-year decrease of 29.8%. Salt Lake is still the company with the smallest revenue among the three giants.

In the downward phase of the cycle, shipment volume and revenue scale are no longer the focus of the capital market. As the saying goes, in a strong market, we look at the trend, and in a weak market, we look at the quality. Profitability and the risk resistance demonstrated by it have become the core criteria for measuring the quality of a company in a weak market environment.

In 2023, Salt Lake's net profit was 7.914 billion yuan, a year-on-year decrease of 49.17%, but the decrease was much lower than that of Ganfeng and Tianqi, and the profit scale has surpassed the two giants.

By the end of 2023, the market value of Salt Lake Co., Ltd. has exceeded that of Ganfeng Lithium and is only slightly lower than that of Tianqi Lithium, ranking second in the industry in terms of market value.

Entering 2024, the price of lithium carbonate still shows no signs of stopping its decline. As of July 15, lithium carbonate has fallen below the 9 yuan mark, with a year-to-date decline of nearly 10%. The average price since the beginning of the year has also fallen to around 100,000 yuan, which is half of last year.

▲The trend of the main lithium carbonate futures contract, source: Wind

What followed was an accelerated decline in the performance of lithium companies. Not only did their revenues continue to drop sharply, but they also began to turn from profit to loss. Even the leading companies in the industry could not escape the cyclical difficulties.

According to the latest interim performance forecast, Tianqi Lithium suffered a loss of 4.88 billion to 5.53 billion in the first half of this year, and Ganfeng Lithium suffered a loss of 760 million to 1.25 billion. Among the three giant lithium companies, only Salt Lake Co., Ltd. still made a profit of 1.7 billion to 2.3 billion, showing strong resilience in the cold winter of lithium prices.

The profitability resilience of Salt Lake has been fully recognized in the capital market. Since the beginning of this year, the Wind Lithium Mine Index has plummeted by nearly 30%, but Salt Lake shares have bucked the trend and risen. The company's current market value is 87.5 billion, far exceeding Ganfeng and Tianqi, which have fallen sharply along with the industry, and even once approached the combined market value of the two companies.

The throne of lithium industry has changed!

【Winning magic weapon】

Salt Lake Co., Ltd. has made a comeback during the downward cycle of lithium prices, thanks to the cost advantages brought by the new lithium extraction technology.

There are two main lithium extraction technologies in the market, namely lithium extraction from lithium ore and lithium extraction from salt lakes. The former has mature technology and high quality, and mainly produces battery-grade lithium carbonate. However, global lithium ore resources are very scarce and are mainly monopolized by a few countries such as Australia. my country's lithium companies are restricted by others in terms of resources, so the cost is relatively high.

In contrast, lithium extraction from salt lakes is an emerging process with greater technical difficulty. It mainly produces industrial-grade lithium carbonate, which requires certain processing procedures compared to battery-grade lithium carbonate produced by extracting lithium from ores.

The advantage of this technology is that the resources are relatively abundant. 60% of the world's proven lithium resources are stored in salt lake brine, far exceeding the lithium resources in lithium ore. Moreover, my country's salt lake brine resources are far richer than lithium ore resources. The salt lakes in Tibet, Qinghai and other places provide abundant brine resources for my country's lithium companies, greatly reducing their production costs.

Among the three giants in the lithium industry, Salt Lake Co., Ltd. is a pioneer in extracting lithium from salt lakes.

The company has the mining rights of Qinghai Qarhan Salt Lake, the largest salt lake in Asia and the second largest in the world, and has outstanding resource advantages. In 2023, the cost of lithium carbonate for Salt Lake Co., Ltd. was 47,000 yuan per ton. According to a survey in April this year, the production cost has further dropped to 28,000 yuan per ton.

Ganfeng and Tianqi, as the two traditional giants in the lithium industry, are representative companies that mainly extract lithium from lithium mines.

In 2023, Ganfeng Lithium's sales cost of lithium metal and lithium salts was 21.4 billion yuan, with annual sales of 104,000 tons. From this, it can be roughly estimated that the company's lithium carbonate production cost may be as high as more than 200,000 yuan per ton.The main reason for the high cost is that most of the company's lithium ore needs to be purchased from outside. Last year, Ganfeng's lithium ore self-sufficiency rate was only about 40%.

The same lithium is extracted from lithium ore. Tianqi Lithium's lithium carbonate production cost is about 61,300 tons per ton, which is much lower than Ganfeng Lithium. The main reason is that the company has a high self-sufficiency rate in lithium ore and low ore costs. The reason why Tianqi Lithium suffered huge losses during the period of lithium price decline is mainly because its business model is relatively complicated. A large part of the company's income comes from external joint ventures and joint ventures, and the cost may be relatively high. It will add icing on the cake to the company's profits during the industry's upswing, but it will also make the loss situation worse during the downturn.

Everyone knows that the cost of extracting lithium from salt lakes is lower than that from lithium mines, but the gap is so huge that it is indeed beyond the expectations of many people.

According to industry data, the average cost of extracting lithium from lithium ore is about 100,000 yuan per ton, while the cost of extracting lithium from salt lakes is no more than 40,000 yuan per ton, and there is still room for cost reduction. Considering that the price gap between battery-grade and industrial-grade lithium carbonate is not large, the cost advantage of extracting lithium from salt lake brine will undoubtedly bring better profit margins and risk resistance.

[Soul of Cycle]

After a sharp drop in lithium prices, the future trend remains not optimistic.

Research data from Hongyuan Futures shows that in 2023, the global supply of lithium carbonate will be 1.0201 million tons, and the total demand will be 980,800 tons, with a small surplus of about 40,000 tons; in 2024, the total supply is likely to climb to nearly 1.4753 million tons, a year-on-year increase of more than 40%, while the total demand will only increase to 1.227 million tons, a year-on-year increase of only 23%, and the surplus will increase to 250,000 tons.

The crazy expansion of production within the industry during the period of lithium price surge has caused the supply growth rate to far exceed the demand growth, exacerbating the current imbalance between supply and demand and casting a shadow on the future trend of lithium prices.

The deeper reason why lithium prices are difficult to stop falling is that despite a serious overcapacity, different companies have different willingness to reduce production due to huge cost differences within the industry.

The current price of 90,000 yuan has already broken through the cost line of most lithium mining companies, especially companies with low lithium mining self-sufficiency rates such as Ganfeng, which may need to gradually reduce production to ensure business safety. However, companies with their own mines, such as Tianqi, can actually continue to maintain. Salt Lake Co., Ltd. and other companies that extract lithium from salt lakes currently have sufficient profits due to extremely low costs. This is an excellent time to expand production capacity and seize market share.

That is to say,The huge cost difference represents the different supply rhythms of the lithium carbonate industry, and also means that this round of lithium carbonate decline cycle may still experience a relatively long bottoming period.

Historical experience shows that a long cyclical winter is often the best opportunity to test the cost control capabilities of cyclical companies, and is also an important opportunity for latecomers to catch up in the industry.

For example, the photovoltaic industry has experienced many cyclical ups and downs since 2013. In particular, after the country cancelled subsidies in 2018, a large number of companies in the industry once fell into losses. However, Longi Green Energy, relying on the cost advantage of the monocrystalline silicon route, has counterattacked and become the global industry leader.

Another example is the pig farming industry, which has experienced a long period of falling pig prices in the past three years. Old high-cost companies such as Tianbang Food have collapsed in the downward phase of this round of pig cycle, while pig companies that entered the market later, such as Juxing Agriculture and Animal Husbandry, have gradually counterattacked to the forefront of the industry with extremely low costs.

In fact,The longer the bottom cycle is, the more beneficial it is for low-cost companies to improve their industry competitiveness. Because the longer the cyclical industry experiences low prices, the more high-cost companies will be unable to support the market and exit, and the industry will be cleared and reshuffled more thoroughly; low-cost companies will also have more time to expand production capacity and market share when prices are low, and then wait for the cycle to reverse.

At present, Salt Lake Co., Ltd. has obviously ushered in an excellent opportunity for capacity expansion, especially since Salt Lake and BYD have achieved deep ties. Against the backdrop of industry downturn and overcapacity, the company's continuously expanding capacity utilization can be fully absorbed.

When lithium prices reverse again, Salt Lake shares may not only have cost advantages but also scale advantages. By that time, the company's leading advantage in the industry may continue to expand.

Disclaimer

The content of this article related to listed companies is the author’s personal analysis and judgment based on the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.); the information or opinions in the article do not constitute any investment or other business advice, and Market Value Observation shall not bear any responsibility for any actions arising from the adoption of this article.