A major battery supplier has shut down an important lithium mine. Will there be a rally?

Prices for lithium and shares of the largest producers of this metal jumped after the news that the world leader in battery production CATL suspended production at its largest mine in China. The market fears that this will lead to a decrease in the supply of this crucial metal, which is used in the batteries of smartphones, electric cars and other equipment. CATL's shares, while others rallied, lost all of the day's gains by the end of trading in Hong Kong.

Contemporary Amperex Technology (CATL) has suspended lithium production at the largest mine in China's lithium hub of Yichun, located in the east of the country, due to the expiration of its license. This was reported by Reuters. According to Bloomberg sources, the pause will last at least three months. CATL assured that the pause will have little impact on its operations.

Expectations that the suspension of mining will reduce the supply of lithium and support prices for the metal, caused a rise in quotations of other producers in Hong Kong, writes The Wall Street Journal. For example, shares of Ganfeng Lithium jumped 20%, which was the maximum growth for them in one day since February 2020. Tianqi Lithium shares added 15%, posting the largest intraday gain ever on the exchange. Shenzhen-based Chengxin Lithium Group shares rose 10%.

CATL's decision also affected Australian miners. Shares of Pilbara Minerals, Liontown Resources and Mineral Resources added up to 25%, Bloomberg notes. At the same time, CATL's securities at the trades in Hong Kong grew up to 2.8%, but then lost almost everything gained and ended the day with almost zero dynamics.

On the Guangzhou Futures Exchange, lithium carbonate prices reached the maximum allowable change in one trading session set by the exchange - an increase of 8% to 81,000 yuan per ton, Seeking Alpha said.

The closure of the mine has increased expectations that the Chinese authorities may limit the work of other enterprises in order to reduce excess capacity in the economy, specifies Bloomberg. According to Bank of America estimates, the mine accounts for about 6% of global lithium production, and other mines in the region account for another 5%.

"We don't expect any significant impact on CATL's battery production from the mine suspension <...> Concerns about the pause are less about CATL and more about whether the entire lithium supply chain will face less availability and whether this will be coordinated by the Chinese government's actions," Eugene Xiao, head of China market strategy at Macquarie Capital, said in a Bloomberg statement.

In China, the situation is exacerbated by the authorities' campaign against "involution" - a policy aimed at reducing overproduction and excessive competition. This has intensified expectations of stricter regulation of the lithium sector, Bloomberg specifies.

As Bloomberg notes, the topic of "anti-involution" has been affecting sentiment in Chinese markets for months. Investors are trying to identify industries that can benefit from Beijing's policy of curbing deflation and limiting excess capacity. According to Citigroup analysts, the closure of the Yichun mines may be part of this policy, which in the long term will contribute to the revision of domestic prices for strategic resources and tighter control over the conditions of their extraction.

Traders and analysts are closely watching the situation in the Yichunya area: local authorities have already obliged eight companies to submit reserve reports by the end of September after an audit revealed irregularities in registration and licensing, Bloomberg noted.

"In the short term, this creates significant upside potential for lithium prices," Matti Zhao, co-head of China equities research at Bank of America, said in a commentary on Bloomberg TV.

Lithium is a metal with unique energy characteristics, Vox notes. It is indispensable in the production of batteries for smartphones, laptops, electric cars, as well as energy storage systems in solar and wind power. Due to its high energy density and efficiency, lithium has become a key element in the global transition to clean energy.

At the same time, The Wall Street Journal said lithium has become a cautionary tale for investors looking to capitalize on the global shift from fossil fuels to green energy. While lithium-ion batteries are playing a key role in the development of electric vehicles and other technologies, the consumer shift from gasoline-powered autos to electric cars has so far been slower than investors and automakers expected, the newspaper noted.

After peaking in 2022, lithium quotations have fallen by about 90% amid a global oversupply caused by the launch of new mines. In recent months, the situation has been exacerbated by slowing demand for electric vehicles. In the US, additional pressure on the industry was exerted by the reduction of some government subsidies initiated by the administration of President Donald Trump.

This article was AI-translated and verified by a human editor