Lithium Market Reaches Two-Year Turning Point as Supply-Demand Dynamics Shift

The lithium market is experiencing a significant inflection point this week, with prices climbing to their highest levels since early 2024. Battery-grade lithium carbonate and hydroxide assessments have surged past US$20,000 per ton on Fastmarkets’ pricing benchmarks for CIF China, Japan and South Korea, signaling a sharp reversal from the sector’s recent struggles. This momentum represents a fundamental shift in how market participants view the outlook for battery materials and electric vehicle production.

Spodumene, the key lithium-bearing mineral extracted by major Australian producers, has broken above US$2,000 per ton for the first time since October 2023. The move reflects broader confidence that the lithium market’s multi-year downturn may finally be bottoming out. Investment bank Bell Potter responded to the price moves by raising its year-end spodumene forecast to US$1,750 per ton—an 89 percent increase from its previous estimate of US$925. While some market participants maintain even more bullish views, with targets reaching US$3,250 per ton, Bell Potter’s upgrade underscores a wholesale sentiment shift across the sector.

Battery Exports and Policy Dynamics Accelerate Near-Term Demand

Chinese authorities recently implemented changes to value-added tax rebates on battery exports that are reshaping near-term incentives for manufacturers. Beginning in April, the rebate will drop from 9 percent to 6 percent, with complete elimination scheduled for January 1, 2027. Although the policy doesn’t directly target lithium carbonate, battery makers are expected to accelerate shipments before the deadline, creating a surge in production orders and corresponding lithium demand.

This policy-driven boost proved powerful enough to push the most-active lithium carbonate futures contract on the Guangzhou Futures Exchange to its daily trading limit earlier this week. The contract settled at 156,060 yuan per ton (approximately US$22,300)—its highest point since November 2023 and representing more than 160 percent gains from last year’s lows. The move signals how sensitive the lithium market has become to policy shifts and inventory changes in China, where recent stockpile levels have hit their weakest position since mid-2024.

Inventory Tightness Amplifies Market Sensitivity

Low inventory levels across China have fundamentally altered how the lithium market responds to demand signals. With stockpiles at their most constrained levels in months, even modest fluctuations in battery manufacturer demand can trigger outsized price movements. This inventory dynamic has made the lithium market increasingly vulnerable to supply disruptions while simultaneously supporting floor prices that deter further production cuts.

The structural tightness also appears to be attracting new categories of market participants. Activity in derivatives markets has become a notable indicator of shifting participation patterns in the lithium market. The Chicago Mercantile Exchange (CME) reported that trading volumes in lithium hydroxide futures reached a record 8,296 tons during the first full week of 2026, surpassing the previous high set in early 2025.

Record Trading Activity Signals Broader Participation

The surge in derivatives market activity reflects a meaningful change in the lithium market’s liquidity profile. According to Przemek Koralewski, global head of market development at Fastmarkets, the correlation between rising spot prices and increasing trading volumes demonstrates how the market’s infrastructure is evolving. “What a year ago was considered a very strong month in volume terms can now be traded in a week,” Koralewski noted, pointing to the growing availability of market liquidity and the expanding participant base.

Understanding the Context: Why This Rally Matters

The current price momentum becomes more significant when viewed against the lithium market’s recent history. The sector endured what many analysts describe as one of the most punishing downturns in recent memory. Years of aggressive capacity expansion created deep oversupply, while electric vehicle demand fell short of expectations. Producers were forced to cut output and suspend development projects as sustained price pressure made operations uneconomical.

Throughout 2025, the lithium market experienced particular distress as North Asian prices fell to four-year lows. Recovery began only in the second half of the year as supply discipline tightened and inventory levels started compressing. By late December, lithium carbonate prices had climbed approximately 56 percent from their January 2025 lows, setting the stage for the current rally.

The Critical Question Ahead

Whether this lithium market upswing sustains will ultimately depend on two variables: the pace at which new production capacity enters service and whether demand growth actually materializes as expected throughout 2026. The combination of tight inventories, policy support for battery manufacturing, and increased derivatives market participation has created favorable near-term conditions, but the lithium market’s structural balance remains the defining factor for longer-term price direction.