On January 24, the stock of Tianqi Lithium Industries (002466.SZ) experienced a significant decline, opening lower and plummeting to a low of 29.85 yuan during the trading dayThis marked a new low for the company, a stark 4-month low that has raised eyebrows among investorsThe sudden drop in share price is closely associated with the earnings forecast the company released on the evening of January 23 for the fiscal year 2024.

In its announcement, Tianqi Lithium forecasted a staggering net loss in the range of 7.1 billion to 8.2 billion yuan, a dramatic contrast to the record profit of 7.297 billion yuan it achieved during the same period last yearThis sharp reversal has undeniably sent shockwaves through the financial marketsTianqi Lithium, a leader in the lithium industry, had profited from its strategic mineral acquisitions and aggressive capacity expansions during the lithium price boom, resulting in skyrocketing revenues from 7.7 billion yuan in 2021 to an astonishing 40.4 billion yuan in 2023. However, the forecast of an impending annual loss signifies a pivotal change for the company, marking its first reported loss since 2021 and drawing intensive scrutiny from market analysts.

The preliminary report provided an elaborate analysis of the factors contributing to the anticipated losses

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Chief among these is the dramatic fluctuation in the lithium product marketThe global macroeconomic climate, coupled with shifts in supply and demand dynamics, has caused lithium prices to plummet considerably in 2024. The average selling prices and gross margins for its lithium products have witnessed a marked decline compared to the previous yearRecent market data indicate that the price of lithium salts has been on a downward trajectory; for instance, lithium carbonate prices have decreased from 500,000 yuan per ton at the beginning of 2023 to as low as approximately 70,000 yuan per ton, breaching the cost threshold for many businesses and severely squeezing profit margins.

Moreover, a mismatch in the pricing mechanisms between its subsidiary, Talison Lithium, and the sales pricing strategy has compounded the company's difficulties, leading to interim lossesThis discrepancy has prevented Tianqi Lithium from making timely adjustments to product prices in response to market fluctuations, further impacting profitability

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Additional pressure is exerted by the performance of its affiliate SQM, which announced a tax-related litigation resulting in an income tax expense confirmation of around $1.1 billion—a blow that directly affected net profits significantly, with predictions for SQM’s performance in 2024 indicating a dramatic year-over-year decline that further reduces Tianqi Lithium's expected investment returns.

In addition to revenue challenges, Tianqi Lithium plans to account for asset impairment provisions totaling 2.163 billion yuan in its 2024 financialsThis provision includes a 700 million yuan inventory impairment reserve, 1.412 billion yuan related to ongoing projects and use rights asset impairments, and a smaller reserve for receivablesThe most considerable impairment is associated with their lithium hydroxide project in AustraliaSpecifically, Tianqi Lithium initiated two phases of a battery-grade lithium hydroxide project in Australia in 2016 and 2017, each with an annual production target of 24,000 tons

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Currently, the first phase is ramping up production, while the second phase faces potential impairment provisions amounting to approximately 1.412 billion yuan in 2024. Given the current market conditions and project realities, the firm has also announced plans to halt further investment in the second-phase project, originally budgeted at 328 million Australian dollars and scheduled for completion within 26 months, with cumulative investment nearing 197 million dollars by the end of 2024. This decisive step reflects Tianqi Lithium's strategy to adjust its operations and reduce risks amidst changing market landscapes.

Overall, the declining trends in lithium salt prices can primarily be attributed to a continuous rise in lithium productionWith global investments in electric vehicles and energy storage escalating, the lithium supply has surged, creating a market oversupply scenarioThis expansion has put immense operational pressure on companies, leading to not only profit squeezes but also rising inventory impairment risks

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Many businesses have been forced to recognize impairments on their inventories to represent their true market values accurately.

However, despite the challenges currently confronting the lithium industry, there are emerging positive indicatorsResearch from Industrial Bank of China’s Yi Credit Fund suggests that leading lithium battery enterprises are entering a new phase of capacity expansion while secondary battery firms begin to recover from low utilization ratesThis suggests an impending improvement in the market’s supply-demand balanceNotably, with considerations for differentiated demands across sectors involving power, storage, and exports, demand for lithium batteries is expected to show growth in 2025. Since the beginning of 2022, the lithium battery industry has experienced consecutive performance declines; however, signals indicate that the sector may have reached a turning point at the onset of 2024. Key contributors to this potential positive shift include the stabilization of upstream resources, market consolidation, and improvement in processing fees and product structures, which may support a resurgence in profitability.

In summary, while Tianqi Lithium's anticipated losses in 2024 present a significant shock for both the company and the market, they also underscore the broader challenges facing the lithium salt industry in the current economic environment