The lithium value chain is currently suffering from a more-quickly-than-expected downturn.
Unless the demand from cathode and battery manufacturers recovers soon, lithium prices might still be bogged down in near turn.
The price of lithium hydroxide also fell to 320,000 yuan per tonne, from nearly 600,000 yuan per tonne late last year.
March was the month when bearish sentiment exacerbated following the news of global leading battery manufacturer CATL’s discounted lithium proposal at 200,000 yuan per tonne for its strategic clients and extensive discounts offered for certain models of internal combustion engines (ICE) vehicles in China.
The former suggested a weakening lithium market while the latter indicates that electric vehicle (EV) sales growth in near term may be challenged as discounted ICE cars will cut at consumers interest in EVs.
The near-term demand outlook for lithium remained bearish after some cathode and precursor manufacturers in China cut production in March.
The weakened domestic consumption is also being reflected in the increased exports of lithium hydroxide from China in the first two months of this year as suppliers from China are more eager to sell in the seaborne Asian markets where demand for nickel-rich lithium-ion batteries remain healthy.
However, this doesn’t mean current demand outside China is rising overall, because while lithium compounds exports picked up, the exports of precursors and cathode materials from China kept dropping in January and February.
Partially the downturn of exports of these battery materials was due to the Chinese New Year holiday when trade flows are normally disrupted.
Additionally, we suspect that it could also be a strategic approach for consumers from Japan and South Korea to reduce monthly commitments in January and February given they still need to pay higher prices for the cargoes due to the lagged pricing mechanism agreed in long-term contracts when majority battery raw materials prices, including lithium and cobalt, kept dropping.
We estimate that the lithium carbonate price in China is likely to be bogged down in low 200,000 yuan per tonne in the near term as the supply chain must first digest the stocks either in the form of lithium compounds or battery cells.
Tesla hits yet another record quarter; but does the market believe in its growth?
Tesla continues to break its production and delivery records, this time recording around 440,000 EVs produced, and 422,000 EVs delivered in Q1 2023, breaking the previous delivery record of 405,000 in Q4 2022, and was one of the few automakers to register a growth from Q4 to Q1.
The company have been aggressively testing its pricing strategy and have been offering massive discounts throughout the quarter in an attempt to clear inventory.
While Q1 was a record quarter, markets have not reacted quite as positively as might have been expected, with the following day stock price opening lower.
The Q1 estimate was expected to be closer to 432,000 on the back of deep price cuts, but there has been muted demand for the company’s models, mainly the Model S/X.
Despite almost a price reduction of 25% since Q4 2022, Model S/X deliveries have been stagnating over the last 3 quarters, with only around 10,000 deliveries in Q1 2023.
The problem of a rising inventory is also catching up to Tesla.
The company is trying to reduce end of quarter delivery pushes through a consistent logistical operation.
Vehicles in transit are also counted towards this inventory and as of Q1 2023, inventory has risen to around 90,000 units, up from 70,000 units in Q4 2022.
Translated into annualized production run rate, it is 16 days of supply in Q1 2023 against 13 days of supply in Q4 2022.
At the end of Q4 2022, around 30,000 units of this inventory was expected to be in transit, while unsold vehicles reached close to 41,000 units.
This is a cause of concern because a piling inventory will require the company to reduce production days signaling to the market that demand is weakening.
In addition, the company’s estimated order backlog has not been too promising with around 120,000 units at the end of Q1, compared to over 450,000 in the same period last year.
While it looks like the inventory can fulfil current order backlog with in-transit orders for Q1 being a part of this, there is also a signal the market is waiting for further price cuts in Q2. If this occurs, Tesla will see a reduction in their gross profit margins, which has not been a concern through 2022 for the company when compared to competitor BYD Auto.
Ultimately, the company may choose to forego profit margins in an attempt to maintain their lead in market share and eventually grow their market cap.
