Commodities | 1:28 PM
Despite weaker lithium prices and renewed supply concerns, leading brokers believe resilient demand, improving cash flow and attractive valuations continue to support the sector's longer-term investment case.
- Lithium supply fears overshadow strong demand
- Strong FCF for producers; growth spending to accelerate
- Electric vehicle momentum helps underpin price outlook
- Broker views on ASX-listed lithium companies
By Mark Woodruff
While lithium equities have surrendered most of their year-to-date gains as spodumene prices retreated from their May peak, UBS retains an Overweight stance.
The broker argues market fundamentals remain robust, and the pullback represents a re-rating toward more sustainable valuations, a view echoed by peers Macquarie and Morgans.
Rather than the beginning of a new downcycle, Morgans attributes the pullback to supply-driven repricing as investors reassess the near-term risk from restarting key lithium operations in China and Africa.
Demand remains resilient and, in the broker's view, is not responsible for the recent price weakness.
Instead, it’s felt volatility in oil prices and renewed sodium-ion battery commentary have created noise, despite limited implications for the underlying trajectory in demand.
Similarly, Macquarie considers the recent weakness across lithium stocks to be overdone, with share price declines of around -45% for Liontown Resources ((LTR)) and around -30% for PLS Group ((PLS)), IGO Ltd ((IGO)) and Elevra Lithium ((ELV)).
Macquarie believes these moves are driven more by general sentiment and near-term earnings downgrades than by changes in underlying fundamentals.
Recent lithium price weakness is linked to the early July restart of Contemporary Amperex Technology Co Ltd’s (CATL) Jianxiawo lepidolite mine in China, which is expected to materially increase near-term lithium supply -- and thus weigh on prices.
All lithium stocks are trading at implied lithium prices below Macquarie’s long-term assumption of US$1,350/t, which is seen as conservative relative to the market consensus range of US$1,400-US$1,500/t.
Casting doubt on some of the lithium price retracement, Macquarie has reservations around the ramp-up at Jianxiawo, noting recommissioning two idled refineries and recruiting workers following the 11-month suspension remain key execution challenges, while the outstanding environmental approval process presents an ongoing permitting risk.
Additionally, Macquarie believes the market may be underestimating future lithium demand. Earlier weakness in sales of Chinese electric vehicles (EVs), despite improving monthly trends, and uncertainty around energy storage system demand have led to an overly cautious outlook for 2027 and beyond, in this broker’s view.
Macquarie continues to favour IGO Ltd, citing attractive free cash flow yields across a range of lithium price scenarios without the need for major project commitments.
Morgans, meanwhile, lists PLS Group as its preferred lithium exposure, highlighting the company's high-quality assets, low-cost operations, strong balance sheet and proven execution.
Upcoming market updates
UBS expects June quarter results to highlight a meaningful increase in free cash flow for lithium stocks under coverage, supported by stronger realised prices and robust margins.
On the flipside, while producers have moved quickly to revive and accelerate growth projects as lithium prices recovered from mid-2025 lows, this broker believes the market is underestimating the capital required to fund the next phase of expansion.
Higher FY27 and FY28 capital expenditure is equally a key theme across Morgans' coverage, with FY27 capex forecasts rising/worsening by -105% for Pilbara Minerals, -72% for Liontown Resources and -50% for Mineral Resources ((MIN)), broadly in line with the increase in consensus estimates since April.
Morgans explains all three companies have materially increased growth spending across their assets, alongside previously deferred expenditure from the trough of the cycle, including mine development, waste stripping and infrastructure, in addition to ongoing sustaining capital.
Despite higher investment, Morgans continues to identify value across the sector.
As Pilbara Minerals and Liontown Resources are trading at more reasonable levels, this broker’s ratings are upgraded to respectively Hold and Accumulate, while Mineral Resources remains at Accumulate, midway between Buy and Hold in this broker’s system.
Spodumene spot pricing and forecasts
Benchmark spodumene spot prices rallied strongly into May, reaching nearly US$3,000/t, before pulling back to around US$2,200/t, still comfortably above prices seen in mid-2025.
Macquarie highlights Guangzhou Futures Exchange (GFE) lithium carbonate futures have been volatile, with the front-month contract falling to a late-June low of US$21,350/t.
A strong correlation is noted between GFE lithium futures and the performance of ASX-listed lithium producers.
Morgans has raised its lithium spodumene price deck across the forecast period, with the largest increase in FY29, up 30.2%, reflecting an expectation that the stronger near-term pricing environment will persist further along the curve.
Morgans' long-term price projection remains unchanged at US$1,300/t, while its FY26 and FY27 forecasts continue to track close to spot prices and sit comfortably within the broader consensus range.
As noted previously, Macquarie’s long-term assumption is for US$1,350/t.
UBS raises its 2026 lithium carbonate equivalent (LCE) demand growth forecast to 21% from 16% after strong growth in global battery production and installations.
While larger average electric vehicle battery sizes and accelerating energy storage deployments continue to support demand, rising inventories are creating near-term uncertainty, prompting UBS to recently lower its short-term lithium price forecasts for 2026 and 2027 by -9% and -12%, respectively.
Nonetheless, pricing is forecast to peak near US$4,000/t in the first half of 2027.
Electric Vehicle demand
June showed signs of a sequential recovery in Chinese EV demand, Macquarie highlights, although year-to-date volumes remain down -14%.
Morgan Stanley notes battery electric EV sales rose 33% year-on-year and 11% month-on-month in June, reaching their highest monthly level since November 2025.
Macquarie explains domestic passenger EV sales in China are down -16.8% year-to-date, partly offset by a 40.2% increase in commercial EV sales, while exports remain strong, rising 120% to 2.36m vehicles.
EV demand is expected to strengthen further in July as new models are launched, while it’s thought the recent correction in lithium prices will help ease battery cost pressures in the second half of 2026.
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