A tale of a looming surplus in the lithium industry: sticky supply to stay?

Lithium is one material that is essential to building our electrified future. Soaring demand for electric vehicle (EV) manufacturing saw lithium prices spike in 2022 amid concerns from carmakers that they might face challenges in securing adequate lithium supplies. Now, as EV subsidies are reduced or removed, demand growth has been slowing and the market is left with a surplus of battery and industrial grade lithium chemicals. 

Our forecast estimates a market surplus of over 436 kt LCE from base case projects in 2026. This equates to 26% of demand.  

Our analysts have looked at the impact on this on the industry and what steps producers could take to avoid saturating the market. Complete the form on the right to download the detailed insight or read on for a short summary.  

Making the grade 

Not all lithium is able to be used to make rechargeable batteries. Battery-grade lithium products have to be of the highest quality and purity, which makes them more complex to produce. New refineries tend to start by producing lower-quality, technical-grade lithium, which is not suitable for batteries. As the refineries begin to fine-tune the purity of their product, battery-grade lithium supply grows.  

Our detailed forecast shows that the market for battery-grade lithium carbonate will have a minor surplus in 2026 and 2027, while the balance for battery-grade lithium hydroxide will show a minor deficit in the coming years. 

Inventory growth 

While the supply surplus is significant and growing, the industry is in its infancy and still evolving. Previously, major producers would have curtailed their production to help balance the market, but with more companies operating in the lithium market, changes beyond those of the majors will be required. 

In a surplus market, the buyers of lithium products will most likely reduce their working inventories to allow for something closer to ‘just-in-time’ procurement. In contrast, the producers of lithium products will likely increase their working inventories as they will need to hold the stock until the buyers are ready for it.  

By converting the surplus into the number of days of inventory, we see the industry needs to hold excess inventory of up to 114 days of demand. This can be effectively managed, but in the scenario where a surplus goes on for years, an annual surplus could be carried over into the subsequent years. This could result in the number of inventory days exceeding 200 in 2027 before it starts to decline, and the overall surplus in the industry will extend even further.

Surplus in lithium chemicals 

Technical-grade lithium chemicals are used in industry end-uses such as ceramics and grease. With growth in these sectors aligned with global GDP growth, it is unlikely these industries can absorb the increased supply. But there are a few options the industry can take to manage the surplus. 

1. Reprocess the material into battery-grade lithium chemicals provided sufficient incentives exists to cover the cost and a reasonable margin. 
2. Increase stockpiles of technical-grade lithium chemicals, which could be stored and converted to battery-grade lithium when the market hits a deficit. 
3. Producing companies could dispose of technical-grade lithium chemicals as a waste product but incur additional costs to do so. 
4. Curtail production to match demand. 

But many questions remain if these actions are feasible for most companies. 

Learn more 

In the first six months of 2024, there were some announcements on project postponements but few around production curtailment linked to over-supply. While this clarification remains opaque, questions arise if this will allow for more trading and higher transparency and how will it affect the push for recycled materials entering the supply chain? 

Wood Mackenzie’s lithium market service and lithium cost service continuously monitor and report on the developments in the lithium industry. If you want to learn more about the fluctuations in the lithium market, contact us or fill out the form at the top of the page to download an exract from our recent insight: ‘A tale of a looming surplus in the lithium industry - sticky supply to stay?’.