Behind lithium's price swing: what the supply chain is actually signalling.

Lithium carbonate on the Guangzhou Futures Exchange rose from approximately 140,000 yuan per tonne in early August to over 153,000 yuan per tonne by mid-month, before facing sharp volatility in recent weeks. I sat down with Tony Gu, Head of Research at Datt Capital, to understand what is driving the move, where supply and demand sit heading into the end of 2026, and what it means for investors with exposure to the lithium value chain.

What is driving the recent price move?

Tony Gu, Head of Research, Datt Capital:

Lithium carbonate on the Guangzhou Futures Exchange rose from about 140,000 yuan per tonne in early August to over 153,000 yuan per tonne by mid-month, driven by several key catalysts.

First, China's industrial activity is set to recover after summer-related extreme heat shutdowns and scheduled plant maintenance. Traditionally, September and October are among the strongest months for China automobile sales, driven by end-of-year promotions and major car launches during auto show season. This seasonal demand, combined with the introduction of the new consumption tax on lithium-ion batteries starting 1 September, has prompted downstream clients to place orders and lock in price ahead of the implementation. The improved order-book visibility has, in turn, encouraged midstream manufacturers to secure upstream supply to fulfil future orders.

Additionally, one of the major price-depressing factors, being the restart of CATL's Jianxiawo mine, which has a designed output of 100kt lithium carbonate equivalent (LCE), or circa 10% of Chinese domestic production, has experienced further permitting and approval delays. This has reduced near-term supply expectations. Given the already-high utilisation rate among midstream chemical converters, we expect the strength in lithium prices to continue in the near term.

However, due to a recent change in the Shanghai Metals Market (SMM) estimation methodology, combined with Guangzhou Futures Exchange (GFEX) specification requirements, we observed sharp volatility in the futures market during the latter half of the month.

We expect this volatility to be temporary and non-structural for several reasons. First, while GFEX lithium carbonate futures can serve as a price discovery tool, actual warehouse receipts are seldom physically delivered. GFEX specifications generally do not meet stringent cathode requirements, as each factory demands specifications tailored to its proprietary product design. While plants may use the futures market to hedge and lock in pricing, physical delivery still relies heavily on stocks that meet exact technical criteria.

Second, SMM has revised its estimation methodology twice in the past twelve months, with both events driving upward revisions to estimated inventory levels. In reality, proprietary inventory data remains a closely guarded trade secret among industry players. This data is rarely shared in a timely or accurate manner, and inherent conflicts of interest introduce further estimation errors into third-party reporting.

From a fundamental supply-demand perspective, Datt Capital's internal estimates indicate that available supply will remain tight. In fact, Ganfeng noted during their latest webinar that they were already experiencing inventory deficits in September, making it increasingly difficult to fulfil physical deliveries owed to customers.

Are we looking at a surplus or a deficit in lithium supply for the rest of the year? What about over time?

Tony Gu:

Based on our internal research, we project a very slim surplus in FY2027, which remains highly dependent on several variables, most notably the restart of Jianxiawo mine, Zimbabwe lithium raw material export ban, and the ability of other global upstream producers to meet their production targets.

Other mainstream consensus, such as S&P Global, expects a surplus of about 109,000 tonnes of lithium carbonate in 2026. UBS and Morgan Stanley forecast a deficit of up to 80,000 tonnes.

As the midstream chemical converters are now operating at a much higher utilisation rate compared to 2023, we anticipate a new wave of capex cycle in the near term, which will ultimately widen the supply deficit further.

Furthermore, recent conflict in the Middle East has led to an acceleration in global EV adoption and the diversification of energy storage solutions. Consequently, we now expect the supply-demand equilibrium to be brought forward, with a potential near-term supply deficit emerging if key producers fail to meet their production targets.

What impact does weather have on lithium supply, given that a portion of it is weather-dependent? What are the risks to watch?

Tony Gu:

Chile holds approximately 60% of the world's brine-hosted lithium resources. Extraction using traditional evaporation ponds typically takes 12 to 24 months, whereas alternative solvent extraction (SX) and direct lithium extraction (DLE) methods remain capital-intensive and involve complex flowsheets.

To date, solar evaporation still dominates global brine production volumes. Despite having a simpler flowsheet compared to SX/DLE methods, the evaporation process can still face several challenges, such as temperature, precipitation and operational issues during extreme weather events. For example, a sharp fluctuation in temperature can cause crystallisation to occur prematurely, resulting in valuable lithium becoming trapped or mixed with other salts.

Globally, meteorological models indicate a historical strong El Niño event, potentially the most intense in over a century. We continue to closely monitor weather patterns across South America's key lithium-producing regions and their subsequent effects on production and supply-chain logistics.

Recently, we have observed severe snow events in high-altitude areas, as well as fatal flash flooding in central Chile last month.

Weather risks aside, the environmental footprint of brine extraction remains the subject of intense debate, largely due to concerns over water depletion and land subsidence. In response to the increasing extraction activity, we have recently seen the Chilean government adopt various regulatory measures, most notably the implementation of a reformed mining royalty framework in 2024.

Weather is not the only supply-side risk. What's happening in Zimbabwe?

Tony Gu:

Zimbabwean lithium producers have asked government for a six-month extension to the country's concentrate export ban, pushing the start date from 1 January 2027 to mid-2027. The reason is that out of three sulphate conversion plants planned to process concentrate domestically, only Prospect Lithium Zimbabwe's Arcadia facility is complete. Sinomine's plant at Bikita and Yahua's at Kamativi are still under construction, and a state-backed project at Sandawana remains at feasibility stage.

A Zimbabwe-Zambia bilateral meeting in November, six weeks before the ban takes effect, is likely to be the first real signal of government intent. Harare has not confirmed or denied the extension. Strict enforcement would remove Zimbabwean spodumene concentrate from the seaborne market at a time when Chinese converters are already running down inventory, adding a second geographic pressure point alongside South America. An extension would ease that near term, but it does not close the gap between the country's mining capacity and its conversion capacity.

Given that China is the world's largest consumer of lithium, are there any market or strategic observations you can share?

Tony Gu:

Since the establishment of the Lithium Carbonate (LC) futures market in 2023, LC futures have served as a primary price discovery tool for the industry. However, in recent years, we have seen global upstream producers pivot away from indexing their contract prices to the lithium carbonate future. Instead, they are increasingly linking contracts directly to upstream raw materials, utilising indices such as the Fastmarkets or Benchmark Mineral Intelligence spodumene concentrate prices.

Simultaneously, legacy offtake structures, which were often tied to the profitability of the offtake partner, typically a midstream chemical converter, are being rapidly phased out. This structural shift in price-setting dynamics signals that upstream producers are transitioning towards their own independent price discovery methods, rather than relying on midstream product benchmarks.

Furthermore, based on current public data, we estimate that Chinese LC social inventories currently sit at less than one month of supply, further underscoring the ongoing tightness across the entire value chain.

Battery energy storage systems (BESS) have become more prominent since the Middle East oil shock. What will this mean for lithium demand?

Tony Gu:

Following the Middle East gas and LNG shock, global governments have increasingly shifted their focus from stockpiling traditional fossil fuels to prioritising electricity storage.

Fastmarkets now expects global energy storage shipments to reach 750 GWh in 2026, up from 460 GWh. Consequently, storage-related battery demand is projected to grow by 55% this year, accounting for 31% of total lithium consumption.

While we see the potential for sodium-ion batteries to meet a portion of these needs in the long term, lithium-based systems will remain the dominant technology in the near term. Ultimately, stationary storage has emerged as a second, less cyclical demand driver alongside electric vehicles, helping to bring supply and demand into equilibrium sooner than anticipated.

The portfolio relevance

Supply chain disruptions in lithium frequently stem from structural bottlenecks that shift dynamically across the value chain over time. These less-researched areas are often overlooked by the broader market precisely because the analytical work required to track them is granular and time-intensive.

The Jianxiawo permitting delay, the Zimbabwe conversion capacity gap, the GFEX methodology shift, and the BESS demand acceleration are each individually material. Together, they describe a market where the consensus surplus-versus-deficit debate understates the complexity of what is actually driving price. Investors positioned at the right point in the lithium value chain, before these dynamics become broadly recognised, carry a meaningful information advantage.