Feature Stories | Oct 13 2023
This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN
Most brokers assume lithium prices have further to fall before a supply deficit looms later this decade. Have lithium mining stocks been sufficiently de-rated?
-Lithium prices falling on weaker Chinese EV demand
-Lithium miner share prices have fallen in concert
-Longer term the future for batteries is bright
-Are mining stocks offering value?
By Greg Peel
Today’s electric vehicles fall into three categories: battery elective vehicle (BEV), plug-in hybrid electric vehicle (PHEV), and hybrid electric vehicle (HEV).
A BEV is a pure battery-driven EV with an electric motor and that’s it. Teslas are the obvious example. BEVs need to be plugged into a power source for charging.
PHEVs are also plugged into a power source for recharging, but also have an internal combustion engine that takes over when the charge runs out, overcoming range anxiety when charging facilities are scarce.
HEVs are not plugged into a power source, but rather are charged by the car braking (look up "regenerative braking"). They also have an internal combustion engine and the obvious example is the Toyota Prius.
In terms of battery size (and thus weight), HEVs are the lowest (some 5Kwh on average), PHEVs next (20Kwh) and BEVs the biggest (60Kwh).
While the fastest growing market for EVs has been China in recent years, and the country leads the world by volume of sales, the Scandies are still way ahead in terms of EVs per capita and charging station capacity. Recently Chinese dealers are finding a shift out of BEVs and into PHEVs and HEVs as Chinese charging infrastructure has not kept up, Morgan Stanley found on a recent visit, despite the government continuing to spend heavily on grid and charging-related infrastructure.
Underlying weaker demand for any EVs is China’s macro environment, in which reluctant Chinese consumers have not exited covid lockdowns to spend with their ears pinned back as Beijing was hoping. Chinese discretionary consumption has disappointed through 2023.
Tesla suffered a -10.9% year on year reduction in sales in China in September, after sales fell -12% in the month from August. One issue facing Tesla is increased competition in the country from Chinese domestic vehicle manufacturers. Local leader BYD saw a 42.8% jump in sales in September of its EV and hybrid models.
But BYD is coming off a much lower base and Tesla still dominates, particularly in the US where it has more than 50% of market share, with the balance spread across US, European, Japanese and Chinese manufacturers each with only a small share.
Weak Chinese EV demand is the primary demand-side driver of 2023’s significant fall in lithium prices. The Chinese lithium carbonate price is down -70% and spodumene down -62% year to date, albeit from giddy heights in 2022.
Note there is no one “lithium price”, nor any global price unlike, say, Brent crude oil.
It’s a Process
The lithium/EV value chain is more complex than any other commodity under UBS’ coverage. The problem is there are many steps in the processing chain, from the mining of raw spodumene through various chemical conversions until a final product is available for lithium-ion batteries.
Each of these products has a price.
Product pricing is mostly China-dominated, notes UBS, and can be opaque. The fact the industry is still in its infancy adds further complexity. Producers at each step hold inventories, the extent or lack of which will inform pricing along the chain.
UBS expects end-demand for lithium-ion batteries to grow at a 25% compound annual growth rate through 2030. But assumptions and working capital and inventories along the chain are difficult to accurately gauge, and UBS is still trying to collect data.
There does appear to be a continued build of battery inventory, the analysts note, but the Chinese midstream sector looks to be holding less precursor material (lithium carbonate) having been stung by having too much inventory as prices have collapsed.
On that basis, UBS sees a limit as to how much more precursor destocking can take place, which would imply some price stabilisation. But as the analysts note, the primary driver of lithium prices is the simple demand/supply equation.
The Supply Side
Only a couple of years ago, there was no better than a handful of ASX-listed lithium miners that drew any attention. Two were Galaxy Resources and Orocobre, which merged to form Allkem ((AKE)).
Now it seems the ASX is groaning under the weight of lithium miners, some of which have come from oblivion to be promoted to the ASX200. Brokers have been adding lithium miners to their coverage at a steady clip.
Other companies have not been left out, with the likes of Mineral Resources ((MIN)), predominantly an iron ore producer at this stage, nickel-producer IGO Ltd ((IGO)) and even Australia’s largest discretionary retail conglomerate, Wesfarmers ((WES)), getting in on the lithium act.
Australia boasts globally significant resources of hard rock spodumene, but Australia-listed miners also have interest domestically and/or in Argentina, which dominates brine production, and elsewhere.
Australia’s lithium sector is still very much in a growth phase as well as boasting existing projects. It is this growth that is major element in medium term global supply assumptions, but now Africa has become a significant marginal producer, Argentina is still there, and China’s own domestic capacity along the chain is also part of the equation.
Expanded supply from previously committed projects will begin to enter the market gradually from this year, Morgans notes. Given that increased supply will meet weaker demand due to current difficult macro-economic conditions (not just in China), Morgans believes lithium prices will continue to move lower into 2025.
UBS has downgraded its lithium priced forecasts by -10-30% over FY24-26.
JPMorgan highlights sluggish battery production volumes in October to date versus September, while China’s domestic volume growth appears strong.
Consequently, JPMorgan struggles to see a catalyst for lithium prices in the near term for lithium prices to rebound, and downgrades its FY24-26 forecasts by -37-47%.
Morgan Stanley’s strategists see supply rising 29% in 2024, outpacing demand growth of 18%, driving a 118kt surplus in 2024. The market surplus is expected to remain until 2028 when the strategists predict a market deficit of -17kt, after which the deficit is projected to rise to -585kt in 2030.
With this backdrop, Morgan Stanley continues to have a near-term bearish outlook for its lithium coverage.
The Long-Term View
Most analysts assume lithium prices will continue to trend lower from here but those at Citi expect prices to track sideways for the next 12-18 months.
Macquarie notes some Chinese lithium refineries started cutting output recently, in line with the analysts’ expectations, which could lead to support for lithium prices.
While near-term pricing may be in question, all agree longer-term the lithium price will rally, as the demand/supply balance swings from surplus into deficit later this decade, and global demand for EVs continues to rise.
Wilsons suggests prices have come under pressure in recent months on the back of headwinds that are cyclical, not structural, in nature. The structural drivers for lithium demand are still intact, and the current sell-off appears to Wilsons overdone. Demand growth over the next decade should remain strong and supply will underwhelm consensus, in the analysts’ view.
China has experienced cyclical softness in demand for EVs this year, driven by a subdued consumer backdrop, which has been exacerbated by inventory destocking by battery cell manufacturers, which Wilsons believes is nearly over.
China’s recent renewal of a tax break extension for EV purchases to 2025 should help to steady sector growth over the medium-term, while the headline data look increasingly positive with EV sales increasing 35% year on year in August, signaling the worst is over for the sector.
The prospect of further fiscal support aimed at stimulating Chinese household demand also presents a potential catalyst for the EV sector and the lithium price over the coming months, notes Wilsons.
Given the significance of demand over the next decade, stemming from the rapid transition to EVs, it is difficult to see a scenario in which overall supply can keep up with the scale of expected demand this decade, Wilsons declares. Industry heavyweight Albemarle estimates around 100 new projects will be needed by 2030 to support demand.
While a significant amount of new supply is forecast this decade, significant risks loom over consensus supply expectations. This is due to the growing prevalence of cost overruns and delays across lithium projects. Increases to growth/sustaining capex combined with longer build timelines across the sector could put upward pressure on the lithium cost curve, which is likely to support higher commodity prices, all else equal.
Global EV penetration is projected to reach 50% by 2030, with the number of EVs on the road expected to surge by 3.4 times current levels by the same year.
By the decade's end, the lithium market is anticipated to face a substantial deficit as demand outpaces supply. Wilsons does not think supply delays are adequately reflected in consensus expectations, which could exacerbate the forecast shortfall.
Which stocks to buy?
The share prices of lithium miners and other battery-related stocks have fallen sharply this year in line with lithium prices.
Hence, while most believe the near-term outlook for lithium prices remains grim, that outlook may already be reflected in share prices.
One thing we can always count on nonetheless is that different brokers will have different views, and recommendations, on different stocks.
Allkem is one miner that does enjoy a full suit of Buy or equivalent ratings among brokers monitored daily by FNArena. However, two out of six – UBS and Morgan Stanley – are currently research-restricted as they are advising on Allkem’s proposed merger with US miner Livent.
Allkem is the most diversified in terms of geography, with interests in Australia, Argentina, Canada and Japan. It also produces both spodumene and lithium carbonate, will enjoy synergies if merged with Livent, and has a balance sheet that should be able to handle the capex required to double production by 2025.
Pilbara Minerals ((PLS)) splits brokers down the middle.
Citi admits lithium prices may yet fall further short-term but has upgraded Pilbara to Buy due to its share price de-rating.
UBS (Neutral) feels market consensus forecasts for Pilbara Minerals are too high and the stock could yet see a -30% earnings downgrade. Morgan Stanley is holding an Underweight concerned costs are too high.
The Liontown Resources ((LTR)) story is currently complicated because it has a non-binding takeover offer on the table from Albemarle, but has since increased capex guidance for its Kathleen Valley project. And to further complicate matters, Gina Rinehart’s Hancock Prospecting has managed to build a significant stake in Liontown at below the offer price.
Either might force Albemarle into a rethink, hence all daily-monitored brokers have Hold or equivalent ratings, waiting to see what happens next.
Having upgraded Pilbara Minerals to Buy, Citi has upgraded Core Lithium ((CXO)) to Neutral from Sell on the same basis.
Core Lithium recently shocked with a maiden profit when a loss was assumed, and Macquarie retains Outperform on retained spodumene concentrate sales guidance for FY24, but Morgans (Hold) sees ongoing material uncertainty around the investment proposition for the miner given the recent need for a capital raise.
Lake Resources ((LKE)) will adopt novel lithium-ion extraction technology at its brine project in Argentina, but recently was forced to double capex, halve production expectations and delay first production to 2027.
Still, the only daily-monitored broker covering the stock, Bell Potter, has a Buy rating.
While there are a plethora of smaller hopefuls garnering attention from brokers FNArena monitors on a periodic basis, the other two stocks in the space interesting daily-monitored brokers are IGO Ltd and Mineral Resources.
Again, Citi has upgraded IGO to Buy on its recent de-rating. UBS and Macquarie also have Buy or equivalent ratings, while last month Morgan Stanley downgraded to Underweight, citing a valuation gap between the share price and lithium prices.
Mineral Resources is another splitting brokers down the middle. The problem is Mineral Resources’ fortunes are currently tied as much to iron ore as lithium, notwithstanding the company also provides mining services.
There are varying views on the trajectory of iron ore prices, leading to four Buys, two Holds and one Sell or equivalent ratings on the stock.
It should be noted current broker ratings are tied to some pretty significant target price reductions among the miners to reflect the fall in lithium prices. Hence ratings are rebased to a lower valuation.
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