OPINION: Western Australia’s lithium boom, which ran out of steam last year, will not be returning soon given the nationwide slowdown in China as it battles to contain the coronavirus outbreak.
All may not be lost for WA’s lithium sector, despite the current slowdown in activity.
Western Australia’s lithium boom, which ran out of steam last year, will not be returning soon given the nationwide slowdown in China as it battles to contain the coronavirus outbreak.
However, despite the current pessimism, there are clues pointing to a lithium revival and the potential for a big deal that could reshape the local mining industry over the next few years.
The first hint of better times ahead for lithium can be found in a research note from investment bank UBS, which believes a bottom is forming in the lithium market, to be followed by a price recovery.
The second hint of change ahead can be found in a financial crisis confronting Tianqi Lithium, China’s biggest producer of the metal used in rechargeable batteries. Tianqi is struggling to service a $US3.5 billion debt taken on to fund a burst of rapid expansion at a time when the lithium price was much higher.
While not as well known in WA as it should be, Tianqi is an important participant in the local industry, firstly as it owns 51 per cent of the world’s biggest and richest lithium mine in the world at Greenbushes in the state’s South West, and secondly as the owner of a world-class lithium chemical plant at Kwinana.
How UBS expects the lithium market to develop and what happens to Tianqi with its debt crisis are two significant unknowns at a time when demand for all commodities appears to be slowing.
But there is a third potential factor at play in what could lead to a shake-up of an industry the WA government would like to become a significant employer, while also offering a chance for the state to do more mineral processing.
That extra feature is the role of the state’s biggest non-mining company, Wesfarmers, which is keen to join the lithium business but has been forced (by the price fall) to delay its entry via a joint venture with Chile’s biggest producer, SQM.
While it's not possible to say that lithium in WA is a case of everything being connected to everything else, there are important linkages in the state’s lithium industry that are providing hints of a possible deal.
These start with Tianqi’s financial problems, which have been caused by it borrowing $3.5 billion from the Chinese government-owned CITIC Bank to buy a 24 per cent stake in SQM: the same Chilean company partnering Wesfarmers in the proposed Mt Holland mine and associated processing plant.
In order to get out of its difficulties, Tianqi might be forced to rethink its global expansion plans and that could mean deciding which assets to keep and which new projects to pursue, either in its own name or as a major shareholder in SQM.
Mt Holland, which is nothing more at this stage than a concept, would be easy to delay for years if it means leaning on SQM’s management to explain that there is plenty of lithium from other sources, including SQM’s world-class brine-based operations in Chile.
Greenbushes and its associated Kwinana processing facility are in the crown jewel category, but if CITIC Bank demands that Tianqi restructure its affairs to service its debts, anything (and everything) could be for sale.
If that happens, Wesfarmers would undoubtedly be interested, putting its Mt Holland joint venture in the deep freeze while buying a stake in a globally important lithium mining and processing business.
If Wesfarmers is not already looking at the possibility of getting a slice of Tianqi’s WA operations it could be soon, especially if business conditions in China deteriorate further as the government enforces restrictions on the movement of people and isolates important manufacturing centres.
But whether Wesfarmers still has an appetite for lithium is a critical question because some analysts are already factoring into their research the potential for an $800 million asset value write-down on the ill-timed acquisition of Kidman Resources, which provided the entry point into Mt Holland.
A lot of what happens next will be lithium price dependent, and while the coronavirus is dulling optimism, investment banks, including UBS, are picking up early signs of improvement.
A recent UBS research note told clients that, during a recent tour of China, its analysts had seen increased activity in the battery metal supply chain.
Positive signs included the opening of Tesla’s new car-making factory in Shanghai, which is expected to be producing 1,000 cars a week by the end of 2020.
How these multiple moving parts mesh will be interesting to watch, especially the prospect of Tianqi being forced to restructure its lithium interests under bank pressure.
