Beijing is adding lithium mining to its long list of crackdown targets. An official probe into alleged environmental rule breaking has imposed shutdowns on China’s largest mine and production hub, according to local reports. Curiously, this could end up benefiting the local electric battery giant CATL.
Miners in Yichun, Jiangxi province, produce about a tenth of the global supply of lithium. This area is home to the world’s largest mine for lithium-bearing mineral lepidolite, with reserves of 1.1mn tonnes.
Coping with crackdowns has become a normal part of doing business in China. Probes and restrictions have spanned the tech, education and property sectors. Harsh scrutiny typically follows share price gains and record earnings.
Global lithium prices hit a record high last year, thanks to surging electric vehicle sales. Ganfeng Lithium, the biggest local specialist, expects preliminary net income for 2022 to rise more than fourfold. Its rival Tianqi Lithium has forecast net income will jump more than 1,100 per cent to above $3.7bn.
Shares of Ganfeng Lithium and Tianqi Lithium have soared more than fivefold, trough to peak, over the past two years. This reflects operating margins that have more than doubled during the period.
Extended shutdowns could hurt these businesses. A couple of years ago, the earnings of battery and electric-car makers would have suffered too. That is no longer universally true.
CATL is the world’s largest manufacturer of electric vehicle batteries and has received strong government support. It supplies nearly 40 per cent of the global market. Its aggressive investments in the lithium sector mean it has access to large amounts of lithium at stable prices. Sources range from Australia and Argentina to Bolivia.
A rise in the cost of lithium from China, which controls two-thirds of world processing capacity, creates relative advantage for better-hedged companies such as CATL. This should support CATL shares trading at 25 times forward earnings according to S&P Capital IQ. It should meanwhile prompt the west to question its dependence on China for a mineral that is globally abundant.
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