Lithium Update: Is the Market Getting Ahead of Itself?
No stocks are simply set and forget, let alone those exposed to the huge structural shift occurring in the automotive industry. The Electric Vehicle industry literally came from nowhere and demand for lithium is delivering a supply response, with production expansion and many projects in the pipeline. After some huge share price appreciation, caution is now warranted.
Downstream lithium prices have stabilised
Leading battery metals consultant, Benchmark Mineral Intelligence, believes the lithium market is now just about balanced, but that the beginning of a deficit is not far away, where more battery grade lithium will be required to satisfy insatiable battery demand.
In China, lithium carbonate prices have stabilised, having experienced a big increase in the past few months, while lithium hydroxide prices have regained their traditional premium.
Lithium carbonate prices were US$13,500-13,800 per tonne in June 2021, a substantial increase on the average price Orocobre (ORE) received in the June Quarter of US$8,476 per tonne, which in turn was 45% higher than the $6k per tonne it was receiving in the quarter prior to that. Lithium hydroxide prices are now US$15k a tonne and normally trade at a US$1,000 to US$1,500 premium due to additional conversion costs for carbonate.
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Upstream lithium supply still catching up
There has been a shortage of spodumene (lithium concentrate) supply to feed chemical conversion capacity in China. This is why Australian producers such as Galaxy Resources (GXY), which is merging with Orocobre (ORE), and Pilbara Minerals (PLS) have been pulling out the stops to lift spodumene production and why spodumene prices are climbing.
Reported spodumene prices are varying between US$700 and US$975 per dry metric tonne in part reflecting the speed of the market change. PLS has recently established a Battery Material Exchange, an online digital platform for spodumene concentrate auctions for non-contracted material. In its inaugural auction in late July, the company accepted a bid of US$1,250 per tonne Free On Board (FOB) Port Hedland for a ‘spot’ 10k dry metric tonne spodumene concentrate (SC) 5.5% cargo, which was well above recent reported prices.
Persistent high level lithium demand growth for the next ten years and above
The medium-term demand outlook for lithium looks very strong. Benchmark is projecting 22% compound annual lithium demand growth over 2020-2030. Based on current operating, probable and possible projects, there is a disconnect between supply and the demand expectations of EV manufacturers, which implies there will be insufficient lithium for vehicle manufacturers to meet scheduled production targets unless there are new additional lithium projects.
For anyone who doubts the strength of lithium demand, the conservative Rio Tinto (RIO) has committed US$2.4bn (A$3.3bn) for its Jadar project in Serbia, which will produce 58k tonnes of battery grade lithium carbonate, with first saleable production in 2026. Rio’s commitment to the project is based on its projections of 25-35% demand growth over the next 10 years.
Radar rating: Strong rally in lithium stocks may be close to pause
There has been a strong rally in the share prices of lithium producers and project developers in recent weeks, which has only accelerated. Producers are trading on new highs in possible overbought territory. Share prices do not rise continually, but experience corrections when all reasonable data over future years is factored in and discounted to today’s value.
We believe it is now time to be cautious. There have already been small retracements in the share prices of some lithium developers. Further retracements in the sector are possible. Our stance is to HOLD current lithium positions, with a preference to add to positions after weakness.
Positive catalysts for stocks, such as resource and development milestones and possible corporate activity, should be monitored for their impact on recommendation.