Lithium market volatility rises as supply surge faces the trade tension and deflationary pressure

The global lithium market is expected to face a significant supply surplus over the next decade, with deflationary pressures from China’s overcapacity in processing and trade tensions with the U.S. threatening to reshape the market’s dynamics. According to Wood Mackenzie, the current oversupply is projected to peak in 2027, followed by a potential shift to deficit by the early 2030s.

At Wood Mackenzie Future Facing Commodities Forum, Allan Pedersen, research director for lithium, “We are now on the brink of a significant supply glut, with supply expected to outpace demand over the next decade. While this may seem like a positive development for consumers, the rapid pace at which supply is exceeding demand could lead to pricing pressures and create long-term market instability unless corrective actions are taken.”

Source: Wood Mackenzie Metals and Mining Lens

After a period of tightness in the lithium market in 2021 and 2022, high lithium prices triggered a global response from producers, with an emphasis on ramping up production to meet growing demand from the electric vehicle (EV), battery, and renewables value chains.  However, despite the industry's efforts, the time required for constructing new assets has delayed the influx of additional supply, with initial volumes from new projects only beginning to enter the market in 2023. As production continues to ramp up through 2027, the market is expected to experience a surplus of lithium, which could disrupt the previously established market conditions.

According to Wood Mackenzie, Australia’s share of global lithium production is expected to decline significantly, from 33% in 2024 to 25% by 2035. Meanwhile, substantial growth is projected in Zimbabwe, several other African nations, and North America. Additionally, Argentina is on track to surpass Chile and become the second-largest producer by 2029. Pedersen added, “As the largest processor of lithium globally, China’s growth will continue, though at a slower pace as assets reach steady-state production. Increasingly, an increasing proportion of supply growth of lithium chemicals will come from outside China as new assets in other regions begin to come online.”

Wood Mackenzie highlighted the impact of falling lithium carbonate prices on the cost curve, noting that current price levels have resulted in zero or negative margins for some producers. This situation has created a growing surplus in the market, which may require producers to curtail their output. Specifically, in China, producers might need to limit production to avoid worsening the surplus. However, given that China is the world's largest consumer of lithium and its production costs decrease as output increases, implementing curtailments could be a challenging strategy.

Adding to the complexity of the lithium market is the ongoing trade war between the U.S. and China, which continues to raise concerns among metals investors. The imposition of tariffs on lithium and other commodities could exacerbate the challenges facing producers, further complicating efforts to balance supply and demand. Additionally, the tensions, along with deflationary pressures stemming from China's overcapacity, have created a volatile environment that may disrupt global trade flows and impact the lithium value chain.

Pedersen concluded, “The challenge is not only managing production volumes but also securing the necessary capital to survive a potential downturn in the short term, until demand growth can catch up. The question remains for the industry whether sufficient capital will flow into the sector to support producers throughout this cycle.”