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Jordan, Investor Network

The futures price of lithium carbonate is stirring up the already turbulent industry.

On August 14, this type of product hit a new low since its listing, with the lowest price of the main contract reaching 72,800 yuan/ton and finally closing at 73,450 yuan/ton. In the past few months, the price of lithium carbonate has continuously fallen below several important integer price levels and is currently approaching a new low of 70,000 yuan per ton. This market performance has brought continuous pressure to upstream lithium mining companies.

As one of the leading companies in the industry, Tianqi Lithium (002466.SZ) has also been affected by the fluctuations in lithium prices, resulting in significant fluctuations in its performance. In addition, the company is also facing the challenge of uncertainty in the control of its overseas investment target SQM (Chilean Chemical and Mining Company), which further increases the uncertainty of Tianqi Lithium's future development.

Challenges of lithium price collapse

Tianqi Lithium is located at the upstream of the lithium battery industry chain. It is mainly engaged in the development of hard rock lithium mineral resources, the processing and sales of lithium concentrates, and the production and sales of lithium chemical products. It has lithium resources in China, Australia and Chile. According to the 2022 production statistics, the company is the world's fifth largest and Asia's second largest lithium chemical product producer, and its annual output accounts for about 5% of the global total.

As of the end of 2023, Tianqi Lithium has a nameplate production capacity of 88,800 tons/year of lithium chemical products, and plans to further expand its production capacity to more than 140,000 tons/year in the future.

At present, China's lithium-ion battery industry is experiencing a booming boom, but on the contrary, the price of its core lithium-ion battery materials has not risen as expected with the increase in demand, but has continued to fall. This has had a significant impact on upstream companies including Tianqi Lithium.

Since the price of lithium compounds peaked in December 2022, the industry has seen a mismatch in the timing of upstream and downstream capacity expansion in 2023. The upstream attracted a large amount of capital inflow, and the new supply gradually increased, while the terminal market suffered a decline in production and sales due to adjustments in new energy vehicle subsidy policies and changes in consumer purchasing intentions. This imbalance between supply and demand has put lithium compound prices on a downward track, especially lithium carbonate prices, which fell sharply from about 600,000 yuan/ton at the beginning of the year to around 180,000 yuan/ton in April 2023 before stabilizing.

However, this short-lived stability did not last long. In July 2023, the Guangzhou Futures Exchange officially launched lithium carbonate futures. This move should have provided the market with more risk management tools, but it unexpectedly exacerbated market concerns about future oversupply, further exerting downward pressure on lithium carbonate prices. In addition, market demand continued to be weak in the fourth quarter, and the order volume decreased significantly, and the market atmosphere became increasingly pessimistic. At the same time, the adjustment of the lithium ore pricing mechanism also opened up space for further declines in lithium carbonate prices.

In 2024, the price of lithium carbonate continued to fall. According to Shanghai Steel Union data, on August 2 this year, the price of battery-grade lithium carbonate had fallen to a historical low of 79,500 yuan/ton, and by August 15 it had fallen to 75,500 yuan/ton, a drop of almost 90% from the peak price of 600,000 yuan/ton, and is approaching its starting price of 40,000 yuan/ton.

Such price fluctuations have a profound impact on the manufacturing cost structure of the midstream of the industrial chain, especially the upstream suppliers, who are faced with the dilemma of whether to choose high or low prices. Low prices threaten their profit margins, while high prices may lead to the loss of market share, posing a severe challenge to the sustainable development of enterprises.

In the lithium battery materials industry, many companies, including Tianqi Lithium, are facing performance pressure due to falling prices. Tianqi Lithium expects a net loss of 4.88 billion yuan to 5.53 billion yuan in the first half of 2024, in sharp contrast to the net profit of 6.452 billion yuan in the same period last year. Tianqi Lithium pointed out in the announcement that the fluctuations in the lithium product market led to a sharp drop in sales prices, which was one of the main reasons for the performance changes.

In addition to direct market price fluctuations, Tianqi Lithium also faces the complexity of equity management of its joint-stock company SQM and the resulting income stability issues. These issues are intertwined and together constitute the complex situation currently faced by Tianqi Lithium.

Investing in SQM is in trouble

In 2018, Tianqi Lithium made a major investment decision to acquire 23.77% of SQM's shares for US$4.066 billion (RMB 27.844 billion), becoming the company's second largest shareholder. This strategic investment aims to enhance the company's business layout and market competitiveness through SQM's leading position in agricultural chemical fertilizers and lithium products, especially its unique Atacama Salt Lake resources in the world.

SQM is a world-renowned supplier of agricultural chemical fertilizers and lithium products. Its production of sodium nitrate and potassium nitrate for industrial and agricultural purposes ranks first in the world. It is also the world's largest iodine producer. In the field of lithium products, SQM has become one of the world's leading lithium product suppliers with its rich experience and technological advantages in the production of lithium carbonate and lithium hydroxide. In addition, SQM has always adopted a prudent cash dividend policy, providing good returns for shareholders.

However, a recent move by SQM cast a shadow on Tianqi Lithium's investment. SQM signed a partnership agreement with Chile's National Copper Company (Codelco) without the approval and authorization of Tianqi Lithium's shareholders' meeting. The agreement stipulates that the two parties will jointly establish a joint venture company to develop the Atacama Salt Lake, a high-quality lithium mineral resource.

This decision gives Codelco a dominant position in the joint venture and will also share the corresponding profits. It also means that Tianqi Lithium, as an important shareholder of SQM, will face significant uncertainty in its future investment returns in SQM, and its voice in the company will also be weakened.

Tianqi Lithium expressed strong dissatisfaction and concern. The company believes that SQM's behavior has seriously damaged its interests as a shareholder, and has repeatedly asked SQM to hold a shareholders' meeting to review the relevant transactions. However, SQM did not adopt Tianqi Lithium's suggestions, but continued to promote cooperation with Codelco.

In order to safeguard its own rights and interests, Tianqi Lithium has taken a series of legal measures. The company filed an administrative reconsideration application with the relevant regulatory authorities in Chile, requesting the revocation of the approval decision on the cooperation between SQM and Codelco. However, this application was not supported. In July 2024, Tianqi Lithium filed a lawsuit with the Santiago Court of Appeal in Chile, requesting the suspension of the effectiveness of the relevant decision. So far, there has been no further progress in the case.

This incident has also attracted widespread attention in Chile. The Chilean House of Representatives launched a proposal to abolish the agreement at a recent special session and passed it by a majority vote. Although this proposal cannot directly abolish the cooperation agreement between SQM and Codelco, it undoubtedly puts some pressure on the promotion of the agreement.

In recent years, the trend of lithium resource nationalization has gradually emerged around the world. Ganfeng Lithium, another leading lithium company, is also facing similar challenges. The Sonora project it invested in faces uncertainty due to the Mexican government's revision of the mining law. The Mexican government has classified lithium mines as strategic resources and banned private companies from obtaining new concessions, resulting in Ganfeng Lithium losing some of its mineral concessions.

Under the dual pressure of the continued plunge in lithium carbonate prices and the uncertainty of SQM's control, Tianqi Lithium is at a critical juncture for a breakthrough. The sharp fluctuations in lithium prices not only test the company's cost control capabilities and market adaptability, but also put higher demands on its long-term strategic planning. However, challenges often coexist with opportunities. Such a market environment may prompt Tianqi Lithium to accelerate strategic adjustments and seek a more stable and sustainable development path. (Produced by Siwei Finance) ■

Tianqi Lithium