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Material Matters: The Outlook For Lithium

Commodities | Dec 20 2022

This story features PILBARA MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: PLS

A glance through the latest expert views and predictions about commodities: brokers have divergent near-term views though are generally positive on the longer-term outlook for lithium.

-Brokers vary on the near-term outlook for lithium
-Citi’s higher-for-longer view tied to electric vehicle demand
-Recent lithium pricing leads to share price volatility
-Preferred stocks in the sector

By Mark Woodruff

Volatility is to be expected for lithium stocks in a commodity market forecast to grow eight times over the decade, according to UBS.

And volatility is what investors have experienced for most ASX-listed lithium names since mid-November.

Macquarie attributes recent share price falls to market sentiment and demand seasonality and remains constructive on the near-term outlook.

Morgan Stanley has an opposing view for the near term. 

It’s felt last week’s auction clearance price on Pilbara Minerals’ ((PLS)) Battery Material Exchange (BME) platform provides part justification for the broker’s recent move to an Underweight stance on lithium stocks under its coverage.

However, the analysts acknowledge further data points will be required to confirm a trend.

This broker’s weaker near-term view is based on caution around battery over-production in China, subsidies being partly phased out and consumer caution impacting electric vehicle (EV) demand.

Citi and UBS also have misgivings regarding the near term though retain a positive longer-term view.

The most detailed recent report was compiled by JP Morgan on global supply of lithium, which refers to global plans for around 100 individual projects. A smaller market deficit in 2023 is now forecast and a fresh wave of supply is expected to hit from 2027 onwards.

Despite this, the broker forecasts a market deficit until 2026 and sees strong valuation support, high production growth, and low multiples for its preferred lithium plays in Australia.

Higher for longer?

Citi’s higher-for-longer outlook for lithium is based upon the commodity’s high exposure to the rollout of EVs globally, but most notably in China.

The broker makes material earnings upgrades to stocks within its Lithium sector coverage to align with the consensus view. While lithium prices have peaked, near-term downside is thought to be limited, particularly for contract pricing.

UBS is also confident on a medium-to long-term view though points to near-term risks relating to EV demand.

The scale at which lithium supply must grow to meet demand is unlike other commodities, points out Citi. As a result, prices should remain disconnected from the cost curve over the medium term.

The analysts find it hard to make a bearish case on a supply response. Indeed, supply may be threatened by technical challenges, cost inflation and long lead times for permits to be granted.

In the near term, the broker feels battery supply chain destocking may weigh on sentiment though China’s reopening plans have potentially reduced downside risks substantially.

It should be noted, the analysts at Citi have not factored in a larger potential recession, which could cause weaker EV and non-EV segment sales.

Forecasts and definitions

Citi raises its long-term (real) spodumene price forecast to US$1,000/t from US$850/t and lifts its 2023 battery grade lithium carbonate forecast to US$60,000/t from US$40,000/t.

JP Morgan forecasts US$1,250/t for spodumene and a long-term price of $18,000/t for carbonate hydroxide.

Carbonate prices should maintain a premium over hydroxide in 2023, according to Citi, due to demand for lithium iron phosphate cathodes.

For the uninitiated, lithium carbonate is a lithium compound which associates with carbonates to become a salt and is mainly produced by extracting it from underground brine pools.

Lithium hydroxide is a lithium-based compound, which compared to lithium carbonate, decomposes at a lower temperature, allowing the process of producing battery cathodes to be more sustainable and results in a long-lasting final product.

Spodumene is considered the most important lithium ore mineral due to its high lithium content.

Recent lithium pricing leads to share price volatility

As an indication that spodumene pricing may be coming under pressure, Pilbara Minerals accepted a bid on its BMX platform on December 14 which was around -3% lower than the winning price in mid-November.

The pricing on this platform is regarded by the market as a leading indicator for other spodumene prices, explains Morgan Stanley. Hence, the lower pricing garnered extensive market attention and led to share price falls in the sector.

Macquarie believes the decline in auction price was anticipated, given spot lithium carbonate prices were down -5-8% since the previous BMX Auction was held.

While the headline number disappointed the market, UBS points out the BMX volume was twice that of recent months. Nonetheless, when combined with recent lithium carbonate futures price action on the Wuxi Stainless Steel Exchange, the broker concedes it is another data point showing that prices are rolling over.

Despite this indication, low volumes of Wuxi futures traded should be also kept in mind before making a read-through for the broader market, noted UBS.

In the last four weeks, spot lithium carbonate prices in China have fallen -5-8%, noted Macquarie last week, however, China lithium hydroxide prices are only down -1% over the same period.

While Platts' spodumene price indicator has softened to US$7,500/t from a high of US$8,200/t, three more years of deficit markets keeps JP Morgan positive on the space.

Broker stock preferences

The largest beneficiary of Citi’s upgraded long-term spodumene price forecast is IGO ((IGO)), as its Greenbushes mine is the highest-grade and longest-life spodumene mine globally. Nickel price upgrades also contribute to the broker’s new rating of Buy, up from Neutral, while the target rises to $17.20 from $15.20.

JP Morgan likes the tier-1 exposure and nickel diversification of IGO, its preferred pick in the sector, and retains an Overweight rating, while Macquarie and UBS have an Outperform and Neutral rating, respectively.

The analysts at Citi remain Buy-rated on Mineral Resources ((MIN)) and Allkem ((AKE)). Mineral Resources (target: to $96 from $86) has exposure to two of the five operating spodumene mines in Western Australia and is considered to have a standout growth option at the Lockyer Deep gas field.

The broker’s target for Allkem rises to $17.80 from $16.50 on higher earnings, offset by a more conservative ramp-up of the James Bay project in Canada. JP Morgan regards Overweight-rated Allkem a deep value play with potentially more production growth potential than other stocks under its lithium coverage. The company is ranked second behind IGO in the sector.

This broker retains its Neutral rating for Liontown Resources ((LTR)) and Pilbara Minerals on valuation.

UBS remains Buy-rated on Allkem, and awaits a re-entry point for both IGO and Mineral Resources, which are rated Neutral. The least preferred is Sell-rated Pilbara Minerals.

As Pilbara Minerals has a comparatively large retail register and is most exposed to pricing sentiment, Citi keeps its rating at Neutral and increases its target to $4.70 from $4.60. On the other hand, Macquarie maintains its Outperform rating and notes the company is generating strong cash flow at current spodumene prices.

Macquarie also has an Outperform rating for both Allkem and Mineral Resources, along with Global Lithium ((GL1)), which only recently released an impressive resource upgrade for its Manna spodumene project in WA.

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