Chinese lithium probe halts a tenth of global supplies

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China’s lithium industry is in crisis as its main manufacturing center, which accounts for about a 10th of the world’s supply, faces massive closures amid a government investigation into environmental violations.

The crackdown in Yichun, Jiangxi Province, followed a local lithium frenzy last year as miners sought to meet runaway demand for battery material – and capitalize on record global prices. Now they are fighting scrutiny from environmental officials sent in from Beijing.

Ore processing operations in Yichun have been ordered to halt as investigators investigate alleged violations at lithium mines, the Yicai newspaper reported. It threatens somewhere between 8% and 13% of global supply, various analysts estimate, though it’s not clear how long the immediate shutdowns will last.

The China investigation brings a large dose of uncertainty to the low-price lithium market, bringing some relief to EV makers as global production picks up. Jiangxi province was expected to be a major source of additional supplies of a lithium-containing mineral known as lepidolite.

“This oversight could mean that the inspection and control of lepidolite mining in China will be more stringent in the future,” said Susan Zou, an analyst at Rystad Energy.

Companies operating in Yichun include major battery manufacturers Contemporary Amperex Technology Co. and Gotion High-Tech Co., whose shares fell more than 1% on Monday. None of the firms returned calls or emails for comment.

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According to Dennis Yip and Leo Ho, analysts at Daiwa Capital Markets, all lepidolite mining at Yichun, apart from state-owned mining, has been suspended, but the refineries are still operating.

Global lithium prices jumped to an all-time high last year as demand from China’s booming electric vehicle industry outpaced production. This is a kind of high-yield, high-demand environment that usually encourages miners to bend the rules in any commodity market.

Some companies have already been prosecuted for violations, including pollution incidents, over the past year. This is a much broader crackdown involving officials from central government departments, including the Ministry of Natural Resources.

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According to the Yicai report, Beijing officials will mainly monitor violations in lithium mines and strive to guide the “healthy development” of the industry. This will mainly target those mining without permits or with expired licenses, he said.

According to Goldman Sachs Group Inc., the Chinese automotive industry’s demand for lithium has fallen by more than half in recent months, leading to a further decline in the market. Prices in China have fallen by more than 30% from last year’s peak.

Shutting down production at Yichun for a month would cut lithium production by an amount equivalent to about 13% of global output, analysts including Citic Securities Co.’s Bai Junfei said in a note Monday. Rystad Energy, a consulting company, estimated the amount at 8%.

“Currently, there are rumors in the market that the investigation may end after two meetings in China next month,” Rystad’s Zou said, referring to the annual parliamentary meetings due in early March.

–With assistance from Alfred Kang and Jason Rogers.

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