The Galaxy Resources Ltd (ASX: GXY) share price has rebounded almost 50% following the Tesla Inc (NASDAQ: TSLA) battery day back in late September. Today, Galaxy announced a multi-year year offtake agreement with Chengxin Lithium Group Co Ltd. Could this be a turning point for the lithium producer?
Tesla battery day sparks fears for lithium demand
A take-home from Tesla’s battery day was when Elon Musk highlighted that lithium was a widely available resource, “one of the most common resources on the planet”, and that “Nevada alone has enough to power all vehicles in the US”.
This dampened the sentiment for lithium producers that hoped to ride the momentum and increasing relevancy of renewable energy and electric vehicles. On battery day alone, the Galaxy share price slumped 13%.
Biden to accelerate shift to renewable energy
President-elect Joe Biden plans to act on climate change immediately and ambitiously. This includes plans for a record $400 billion investment over 10 years, as one part of a broad mobilisation of public investment into clean energy and innovation.
The breath of fresh air for the renewables industry from Trump to Biden has seen a subtle shift to bet against the fossil-fuel industry and buy renewables. The Galaxy share price has been able to enjoy the recent uplift in sentiment, increasing 17% this month and hitting pre-Tesla battery day levels.
Multi-year offtake agreement
On Wednesday, Galaxy signed a three-year agreement with Sichuan Chengtun Lithium Co, a wholly owned subsidary of Chengxin Lithium Group Co Ltd. Chengxin has agreed to purchase 60,000 dmt per annum (+/- 10%) of spodumene concentrate from Galaxy in each year, 2021, 2022 and 2023. To add some perspective, Galaxy shipped 16,753 dmt of spodumene concentrate in the thrird quarter and a further 15,7000 dmt in early October.
Due to current soft market conditions, Galaxy’s near-term sales volumes and shipping schedules will be largely dictated by the spot price that Galaxy is willing to accept and the pace customers are able to destock their inventory levels. Mt Cattlin’s current final product inventory levels plus forecast production for the fourth quarter of 2020 are sufficient to meet requirements for this quarter.
Galaxy CEO Simon Hay said the company expected to conclude 2020 with additional shipments to customers and for Galaxy’s spodumene inventory to return to normal levels.
The drawdown of inventory combined with strong customer indications for demand in 2021 has also led Galaxy to examine the potential ramp up of Mt Cattlin back to full rate in 2021, although there will need to be sustained price increases for us to commit to the return of higher production levels.
While there is an anticipated lithium demand surge in the medium to long term, the lithium spot price currently remains at multi-year lows. Only time will tell if the spot price will match the bullish sentiment for lithium demand and commitment to renewable energies.