The lithium supply chain in China is currently experiencing unprecedented upheaval, akin to a seismic event, as it grapples with external setbacks and internal challengesInitially, on June 3, Tianqi Lithium's overseas assets faced a significant threat when a major foreign investment came under scrutiny, followed closely on June 6 by the alarming news that lithium carbonate futures fell below the 100,000 RMB mark once againThis downward spiral raises pressing questions: Can Tianqi Lithium navigate through these turbulent waters and manage to appease investors? Moreover, is the market for lithium, often dubbed "white petroleum," showcasing signs of an unsustainable supply-demand balance?

The situation is dire, with the fissures of external and internal injuries proving to be quite severe for the lithium giantTianqi Lithium, China’s leading player in the lithium resource sector, faces a particularly tough landscape as the Chilean government pushes forward with its plans for the nationalization of lithium mining resources

Notably, Tianqi's $4 billion investment into Atacama Salt Flat is now jeopardized, as its stakes in this vital ore source could be severely diluted, thereby drastically reducing future earnings.

According to the latest reports released by Tianqi Lithium, its partner company, Sociedad Química y Minera de Chile (SQM), has disregarded Tianqi's requests and signed an agreement with the Chilean national copper company, Codelco, to form a joint ventureIf the arrangement comes to fruition, SQM risks losing control over its crucial lithium operations, leading to dire consequences for investment returns and overall economic viability.

Tianqi Lithium's potential loss, estimated at a staggering $4 billion, could bring about a significant chokehold on the lithium resource supply chainIt's important to note that this is not just speculative; earlier this year, the company reported substantial losses attributable to Chile's enhanced mining income tax policies, leading to an estimated deficit of approximately 3.9 billion RMB for the first quarter of the year, with 1.7 billion RMB allocated for tax refunds alone.

With such severe external injuries, internal troubles compound the challenges Tianqi Lithium faces

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Entering the first quarter, lithium carbonate prices, which had shown a brief upward trend in February, have since plummetedBy June 6, primary futures for lithium carbonate crashed below the 100,000 RMB threshold once more, leading to catastrophic effects on Tianqi’s finances, with a staggering 77.42% decline in first-quarter revenues and net losses approaching 3.9 billion RMBThis downturn also resonates across the energy metals sector, where the average net losses for similar enterprises hover close to 226 million RMB.

Tianqi's situation embodies a multifaceted crisis, evidencing extensive systemic challenges within China’s lithium industryWhile the external factors do not appear fatal, Tianqi Lithium's dual-pronged strategy to manage the crisis highlights a proactive approachTo confront these challenges, the company is ardently pursuing legal remedies and protective measures, pushing for shareholder meetings to address SQM’s recent dealings and seeking approvals that uphold shareholder interests.

Simultaneously, Tianqi is also amplifying its investments in alternative lithium resource regions

Key focus areas include the Greenbushes lithium mine in Australia and the Zhegn Lake lithium resource base in Sichuan, ChinaAccording to their reports, Greenbushes is currently the largest operational lithium mine globally in terms of production capacity, accounting significantly for about 30% of global lithium concentrate output, and an impressive 40% of worldwide lithium production yields.

At the moment, Tianqi relies solely on its holdings in Australia, exemplifying how the supply chain centralizes around specific geographic locationsThe Australian subsidiary's lithium concentrate is shipped to Chinese ports and then distributed to processing facilities across ChinaOn the home front, Tianqi is methodically advancing operations on the Zhegn Lake lithium mine project, further solidifying strategies that ensure sustainable growth despite external challengesBy the end of 2021, the Zhegn Lake mine was reported to contain a lithium resource equivalent of 632,000 tons of carbonate with an average concentration of 1.3%.

While Tianqi’s exposure to Chilean resources could yield some risk, this particular challenge is not seen as lethal to the business’s viability

Instead, it’s primarily perceived as a temporary quagmire rooted in financial and market fluctuationsOn a more strategic level, understanding the balance between a fluctuating lithium carbonate market and the burgeoning demand for energy storage and electric vehicle batteries is critical.

Despite potential black clouds looming on the horizon, the scramble for lithium resource expansion continues unabated, raising concerns about overproduction and supply-demand discrepancies in the marketAs industry analysts note, maintaining stable prices around the 100,000 RMB mark for lithium-carbonate is crucial for the financial health of companies like TianqiAlthough Tianqi’s revenues saw a significant drop of 66.04%, the net asset return remains robust at 14.61%, demonstrating a strong underlying performance despite hardships.

The miscommunication here lies in the phenomenal profit earned by lithium companies in 2022—a benchmark that now creates inflated expectations amidst weaker pricing structures seen in 2023. The looming question appears to be whether the demand growth for lithium-ion batteries will keep pace with the rapid expansions in supply

Currently, while sales of electric vehicles and lithium battery products in China have far surpassed expectations, leading to notable increases in production rates, the actual supply of lithium derivative products and ores threatens to significantly overshoot market capacity.

Data revealed by the China Association of Automobile Manufacturers indicated that 790,000 new energy vehicles were sold in May, marking a 36% increase year-on-year and a substantial 17% growth compared to AprilFurthermore, China's lithium cell production soared to approximately 94.9 GWh in April, reflecting an 11% rise from the previous month.

In contrast, the pace of lithium ore and carbonate supply growth has taken an even sharper trajectoryProjections suggest that by 2024, global lithium salt production capacity could escalate to 1.91 million tonnes—a staggering 203% increase—primarily catalyzing from swift expansions among lithium carbonate manufacturers

For instance, China's lithium carbonate production reached about 6.5 million tonnes in May, climbing by 16.07% month-over-month and an astonishing 124% compared to the previous year.

Moreover, as per incomplete statistics by Mysteel, lithium ore imports in China reached 434,800 tonnes in April, representing a month-on-month increase of 13.33% and a year-on-year growth of 21.34%. Stockpiles sitting in ports and warehouses counterbalance these expansions with a recorded increase, indicating that supplies from regions such as Africa are steadily coming online.

This ongoing structural dynamic presents a conundrum: while lithium carbonate supply is increasing sharply, lithium ores continue to command high prices amidst sustained market pressuresThe result puts significant strain on manufacturing profitability, leading to substantial risks for enterprises like Tianqi Lithium and a potential reckoning for the entire Chinese lithium resource sector.

As we look to the second half of the year, uncertainty hangs in the balance—will the demand for new energy vehicles and energy storage solutions continue to rise at the same rapid pace as observed in the first half of 2023? Will overseas lithium mines maintain their pricing power? Most critically, how will the supply-demand imbalance in the lithium carbonate market unfold as production ramps up?