Awaiting The Next Lithium Upswing

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Lithium prices remain weak, but there is a growing expectation a turnaround is on the cards. It’s just a matter of when.

-Battery demand softer than expected
-Lithium remains over-supplied
-Low prices should lead to supply re-balancing
-Brokers nominate their preferred exposures

Greg Peel

Lithium prices have remained under pressure in 2024, driven by a combination of softer than expected battery-sector demand and an influx of new supply into the market. Near-term oversupply is larger than previously anticipated.

On the demand-side, global electric vehicle uptake has decelerated, most notably in the US and Europe, where cost of living pressures have prevailed, and also in China, which is suffering from a prolonged economic downturn.

The near-term outlook for lithium demand in China has been further clouded by tariff initiatives from both the US and Europe on government-subsidised, and thus artificially cheap, Chinese EVs.

It has been noted that while Australia’s burgeoning lithium mining sector has been subsequently impacted, having no car manufacturing industry of our own, let alone EVs, means said Chinese subsidies are resulting in cheap EVs benefiting consumers in Australia.

This softer demand backdrop has driven severe inventory de-stocking across the battery supply chain over the last year, creating a downward spiral in lithium prices and demand.

On the supply-side, global lithium supply has grown meaningfully over the last year.

This has been driven primarily, Wilsons notes, by higher cost resources including African spodumene and Chinese lepidolite. In terms of known near-term additions, capacity is being ramped up in Zimbabwe, the Congo and Chile. The broker points out there is a degree of uncertainty around the magnitude of future near term China/Africa additions.

In the nearer term, Morgan Stanley’s commodity strategists see risks of a loosening balance, with supply improvements from Australia, for example the ramp-up of IGO Ltd’s ((IGO)) Greenbushes joint venture, as well as from China, Chile, and Africa post wet season.

During a recent trip to China, Macquarie noted more resilient than expected lithium supply upstream, which could weigh on lithium prices in the near term.

Lithium mine and refined supplies are concentrated in a small number of countries. Australia and Chile dominate the upstream (mining) markets, while China controls 70% of the downstream (processing) market. This makes lithium and battery supplies vulnerable to country-specific risks, ANZ Bank’s commodity analysts note.

Near-term surpluses are symptomatic of lithium’s relative immaturity as a major global commodity market, Wilsons point out, which has driven a temporary mismatch in the aggressive growth profile of both supply and demand.

The Supply Side

While weak near-term sentiment appears likely to persist for the remainder of this calendar year, Wilsons is confident further downside for lithium prices will be limited from here given support provided by the cost curve. The broker’s positive long-term structural view towards lithium remains unchanged.

Strong growth in lithium demand is still likely to result in compounding supply deficits this decade, which underpins Wilsons’ expectations of higher lithium prices over time.

A strong supply response to the recent collapse in the price of lithium is setting the stage for a market rebalancing, ANZ Bank suggests, but a sustained recovery is unlikely until overcapacity in the supply chain for lithium batteries is reversed.

The persistently weak price is prompting lithium producers to apply fiscal discipline. High-cost miners and processors are likely to exit the market and other producers will either reduce or defer investments. Given this is usually what the playbook dictates, ANZ believes supply adjustments are likely.

Wilsons agrees.

A meaningful proportion of producing and prospective lithium projects will be unprofitable at the current lithium price, Wilsons notes. This is likely to result in higher-cost lithium producers mothballing their production and/or deferring expansion projects, which will eventually result in supply exiting the system.

There have already been examples of this domestically, Wilsons points out, with Core Lithium ((CXO)) suspending mining at its Finnis operation earlier this year until market conditions improve. Over time, this dynamic should improve the supply/demand balance of the market, reducing forecast surpluses which the broker expects to support lithium prices.

Wilsons cites the dusty old adage: the best cure for low prices are low prices.

We have seen this in recent years with regard the uranium price. Post the 2011 Fukushima disaster, the spot uranium price fell to as low as US$17/lb, as Japan shut down all its reactors and nuclear energy once more became a dirty word among the global populace, forcing the shutdown/mothballing of uranium mining projects. Earlier this year the spot price traded above US$100/lb as nuclear energy regained global support in the face of climate change.

Still gaining support in some countries, I hear.

While the timing of a recovery in the lithium price is inherently uncertain, Wilsons suggests assessing cost levels provides insight into where prices may receive some fundamental support. The cost curve of existing projects suggests further downside to lithium prices is likely to be limited, with the S&P Global 2024 global lithium cost curve implying some 20% of assets aren’t profitable on a total cash cost basis.

Wilsons points out this assessment arguably under-represents the level of cost support as it excludes project and sustaining capex requirements.

The broker is thus comfortable that we are at, or near, a “price floor” for lithium, with further downside likely to be limited from here.

Yet, Goldman Sachs points out with lithium spot prices still sitting near the top end of the integrated cash cost curve, we have yet to see meaningful volumes come out of the market or new projects deferred. In fact, new projects continue to be proposed, such as Pilbara Minerals’ ((PLS)) “P2000”, or progressed.

Furthermore, direct lithium extraction (DLE) is set to become a commercial reality outside China later this year, with French company Eramet recently inaugurating its new plant. With this backdrop, Goldman Sachs continues to factor in near-term pricing weakness over the second half of 2024 and through 2025.

Morgan Stanley is also not so convinced of a near term price recovery.

Lithium prices did indeed stage somewhat of a recovery over March-April this year, but have once again come under pressure, currently trading -26% weaker year to date, Morgan Stanley notes. After years of under-investment, the price highs seen in 2022 have led to a significant ramp up of investment in new supply capacity, a driving force behind the over-supplied market the broker’s strategists estimate will continue beyond 2030.

The Demand Side

Morgan Stanley also sees risks on the demand side, with cathode restocking in China appearing to slow as inventories remain at their highest levels since June 2023, as well as the potential for falling lithium intensity on the back of hybrids gaining EV market share.

Global battery EV sales were up 12% year to date in June, JPMorgan notes, but the market share of petrol hybrid EVs continues to trend higher and currently sits at an all-time high of 21%.

ANZ Bank suggests demand for lithium to support the electrification of the transport sector remains strong. ANZ analysts see demand for lithium and lithium-ion batteries growing 17-18% annually through 2030. The supply overhang is not that large, ANZ believes, and the fall in prices looks overdone. ANZ sees prices rising in 2025.

Despite current cost-of-living headwinds, global passenger EV sales (in total) have continued to demonstrate strong structural growth, Wilsons notes, rising 26% year on year over the first five months of 2024. Moreover, consensus expectations are still for strong growth in EV sales over the long term, despite recent concerns around the potential impacts of tariffs on Chinese EVs and “net zero” emission target setbacks in a number of countries.

S&P Global forecasts a compound annual growth rate for EV demand of 20% to 2028.

Over the next decade, demand for EVs will be supported by the car maker-led transition towards EVs, Wilsons believes, which is driving a greater choice for consumers and improving EV affordability. Government incentives are also promoting EV uptake.

Therefore, in line with most industry forecasters, Wilsons continues to expect strong growth in demand for lithium, driven by EV demand, to result in compounding supply deficits over the long-term which will support higher lithium prices over time in the broker’s view.

The declaration of “in line with most industry forecasters” is Wilsons’. Clearly, not all agree on the timing of a lithium price recovery, however “near term” and “long term” have no specific definition. Nor has “over time”, as Wilsons suggests above.

That said, just as de-stocking has been the key driver of the downswing in lithium prices since 2023, the most significant near-term catalyst for a recovery in the lithium price will be the commencement of demand-driven re-stocking across the battery supply chain.

While the exact timing of when re-stocking will occur remains unclear, with inventory levels now relatively low, Wilsons expects re-stocking to support a recovery in the lithium price sometime over the next 12-18 months, before emerging structural supply deficits manifest themselves over the medium/long-term.

As re-stocking emerges, Wilsons believes a lithium price recovery could be equally as swift as the pace of decline in lithium prices experienced from early 2023 to now.

Preferences

Wilsons’ Focus Portfolio includes lithium exposure via Arcadium Lithium ((LTM)) and Mineral Resources ((MIN)). The producing assets of both companies are low on the cost curve, which has allowed both to generate positive operating free cash flows to date despite depressed lithium prices.

Arcadium Lithium’s balance sheet is very strong, the broker points out, and gearing is expected to remain very low over the next few years.

While Mineral Resources’ current gearing is relatively high, this reflects its recent capex cycle focused on Onslow iron ore. With the company now past “peak capex”, and cash flow from Onslow set to build over FY25-26, Wilsons is comfortable the level of gearing will fall materially over the next 12-24 months.

Goldman Sachs sees Arcadium Lithium’s current discount to net asset value as fair, and in part representative of upcoming growth/execution risk with more than 60% of estimated 2030 raw material production yet to be built/ramped up.

For Liontown Resources ((LTR)), though Goldman expects more modest cost escalation based on the analysts’ benchmarking, the broker remains Neutral on relative valuation, and upgrades Core Lithium to Neutral with risks now more priced in.

Goldman has a Sell on Pilbara Minerals, noting the stock continues to trade at a fundamental premium versus peers, even when including an underwhelming “P2000” expansion scenario. Goldman Sachs sees a widening discount supporting its relative preference for IGO (Buy), given the analysts feel the Greenbushes expansion (and opportunity for value optimisation) and JV balance sheet risk are overdone, with Greenbushes’ costs well below peers.

Morgan Stanley remains cautious on lithium equities in general, and is Underweight on both Pilbara Minerals (100% lithium) and IGO (46% of forecast FY25 revenue lithium-exposed).

Morgan Stanley’s preferred name for lithium exposure is Mineral Resources, however, this is primarily due to its ramping lower cost iron ore exposure from the Onslow project and an improving balance sheet.

JPMorgan notes (as at July 9) IGO’s and Pilbara Minerals’ share prices are down some -30% since late May compared to -1% for the ASX200 (at the time), and with valuations looking less demanding, this broker upgraded both to Neutral.

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