Time To Buy The Dip As Lithium Stocks Tank?

Stocks of lithium producers have been badly hammered in the current year as lithium prices continue on the race to the bottom.
After hitting an all-time high of $81,360 per tonne in November 2022, lithium carbonate prices in China have cratered to the worst level in two years at $20,782 per tonne.
Bank of America’s Steve Byrne anticipates a lithium glut will continue into 2025.

After soaring to all-time highs amid the epic lithium boom of 2021/2022, stocks of lithium producers have been badly hammered in the current year as lithium prices continue on the race to the bottom. Shares of American lithium giant Albemarle Corp. (NYSE:ALB) have cratered -46.6% in the year-to-date with the company recently warning that it could lose market share to Chinese producers after failing in its takeover bid for Australian lithium producer Liontown Resources Ltd (OTCPK:LINRF).

Albemarle was forced to abandon the $4.2B merger after Australia’s richest woman, Gina Rinehart, for the fourth time in a matter of weeks, added to her Liontown Resources stake to bring it just shy of the 15% needed to potentially block Albemarle’s takeover.

Albemarle’s peers have not fared any better: shares of Sociedad Química y Minera de Chile S.A. (NYSE:SQM) have declined -39.4% YTD while Livent Corporation (NYSE:LTHM) is down -27.2% Only Lithium Americas Corp. (NYSE:LAC) remains in the green with a meager 0.7% gain so far in the year.

After hitting an all-time high of CNY 595,000 per tonne ($81,360 per tonne) in November 2022, lithium carbonate prices in China have cratered to the worst level in two years at CNY 151,500 per tonne ($20,782 per tonne) in the current month, good for nearly 75% correction as a string of negative catalysts combined to quash lithium’s biggest rally ever. The situation is even more dire for lithium hydroxide markets thanks in large part to the sluggish performance of the nickel cobalt manganese (NCM) battery sector in comparison with the lithium iron phosphate (LFP) battery sector.

Although several factors are to blame for the selloff, what has really spooked the markets is looming supply coming online from China, Australia and Chile, “Supply is coming on stream faster than you can say ‘boo’. Demand remains strong but prices have been unsustainable for some time now,” analyst Dylan Kelly of Ord Minnett has told Mining.com.

But part of Wall Street is beginning to turn bullish on lithium, again. Morningstar has argued that shares of all four lithium producers above are ‘materially undervalued’, and says the market has priced in an unrealistic scenario wherein lithium prices fall to $15,000 per metric ton in 2026, well below the marginal cost of production of $20,000 on an all-in sustaining cost basis. Morningstar has advised investors to use the deep selloff to build fresh positions in these stocks.

Source: Trading Economics

Lithium Shortage In 2025

Morningstar belongs to the bull camp that frequently points out that low prices are the best cure for low prices–and they are not alone. BMI, a Fitch Solutions research unit, has predicted a lithium shortage could hit as early as 2025 largely due to China’s lithium demand exceeding supply.

“We expect an average of 20.4% year-on-year annual growth for China’s lithium demand for EVs alone over 2023-2032,” the report stated. In contrast, BMI sees China’s lithium supply growing at a much slower 6% annual clip over the same period, pointing out that that rate is not enough to meet even one-third of forecast demand.

The inability of China to meet its own demand for lithium despite being the world’s third-largest producer spells disaster for other countries that rely on Chinese lithium.

Rapid EV adoption is the biggest reason why China has developed an insatiable appetite for the white metal with BloombergNEF predicting that new passenger electric vehicle sales in China will account for 60% of global sales at 14.1 million units in 2023. Last year, electric vehicle sales in China accounted for around a quarter of total passenger car sales in the country, nearly double the U.S.’ rate at one in seven and Europe’s one in eight. But it’s not just China recording supercharged EV growth: according to forecasts by S&P Global Commodity Insights, global EV sales will clock in at 13.8 million units in 2023, and surge to over 30 million by 2030.

BMI is not the only lithium bull here. “We do fundamentally believe in a shortage for the lithium industry. We forecast supply growth of course, but demand is set to grow at a much faster pace,” Corinne Blanchard, Deutsche Bank’s director of lithium and clean tech equity research, has told CNBC. Blanchard sees a “modest deficit” of around 40,000 to 60,000 tonnes of lithium carbonate equivalent by the end of 2025, but has forecast a much wider deficit to the tune of 768,000 tonnes by the end of 2030.

Clearly, not everybody is sold on this EV boom/lithium shortage thesis. To wit, Bank Of America analyst Steve Byrne anticipates a lithium glut will continue into 2025 with “a period of earnings and margin pressure across the value chain.” BofA has downgraded ALB to Underperform from Neutral with a $161 price target, slashed from $212, citing continued lithium oversupply.

By Alex Kimani for Oilprice.com