Why Lithium Prices Are Rising Again: The Supply Chain Explained

China's benchmark lithium carbonate contract rose by almost 13% in the week to 15 August 2026, after hitting a six-month low. Tony Gu, Head of Research at Datt Capital, explains what is driving the move and what it means for the lithium market.

Lithium prices have been volatile of late but appear to have firmed in the past week or so. What is driving this?

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's 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[1], has prompted downstream clients to place orders and lock in prices 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.

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

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 the Jianxiawo mine and the ability of other global upstream producers to meet their production targets. Other mainstream consensus forecasts, such as S&P Global, expect 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 midstream chemical converters are now operating at a much higher utilisation rate compared with 2023, we anticipate a new wave of CAPEX activity 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?

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 with 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 historically strong El Niño event in 2026/27, potentially the most intense in over a century[2]. We continue to closely monitor weather patterns across South America's key lithium-producing regions, particularly as central Chile was recently impacted by severe flooding that caused at least 10 fatalities 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 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.

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

Since the establishment of the Chinese LCE futures market in 2023, LCE futures have served as a primary price discovery tool for the industry. However, in recent years, we have seen global upstream miners and producers pivot away from indexing their contract prices to LCE. Instead, they are increasingly linking contracts directly to upstream raw materials, utilising indices such as 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 LCE social inventories currently sit at just 20 days 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?

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.

Portfolio relevance

Supply-chain disruptions frequently stem from structural bottlenecks across the value chain, shifting dynamically over time from upstream to downstream. Often, these less-researched areas can be overlooked by the broader market. The Datt Small Companies Fund focuses on these nuances. The fund aims to identify opportunities before they become mainstream.

Key takeaways

Lithium prices remain supported by peak seasonal demand, critically low inventories, and ongoing supply disruptions across key producing regions. The market remains split on whether 2026 will see a surplus or deficit. Ongoing geopolitical tension, emerging extreme weather events, and demand-side variables will likely decide the outcome.

To learn more about how Datt Capital researches supply-chain dynamics in Australian small caps, visit our Small Companies Fund page or contact our Distribution Manager, Daniel Liptak, at 0419 004 524 or by email at daniel@datt.com.au.

[1] Lithium batteries and storage batteries: A 2% tax rate will be levied from 1 September 2026. The tax rate will be restored to 4% from 1 September 2027. This applies to mercury-free primary batteries, lithium primary batteries, lithium-ion storage batteries, nickel-metal hydride storage batteries, vanadium redox flow batteries, etc.

[2] https://interactive.carbonbrief.org/el-nino-explainer/index.html