Macquarie are at it again. They released their "Commodities Compendium" a few days ago and they are most scathing on the Li prospects. Here's an extract of what they reckon:
"After rising 80% in 2016 on the back of the EV story, lithium prices spent 2017 in more of a consolidation mode, ending the year up a mere 24.4% at just under $13,000/t CIF China lithium carbonate equivalent (LCE) basis, according to data from China Customs. In the New Year prices took another turn higher, according to the January data, though this may have been a delayed function of the December sell-off in USD.
The stubbornness of the LCE import price was interesting considering that our tabulations of strongly rising new mine supply, mainly from Australia, backed up by the trade data which showed a huge increase in volumes of lithium mineral substances including spodumene (trade code 25309099) from the middle of last year (fig. 152). The volumes would imply that the market already shifted into oversupply last year, yet paradoxically the price activity infers that scarcity was still in place. We think what has taken place is that the rising volumes of rock in both direct shipment ore (DSO) and higher grade spodumene form have travelled to China, but have become trapped by a bottleneck in converter capacity. Anecdotally we are told that large amount of rock is stocked outside the converters currently. This has prevented the tonnes from processing further downstream, thus allowing converted lithium prices to remain strong."
They are making one big assumption that troubles me - they are including significant volumes of DSO product in their calculations of supply. We have seen that this is sitting at converters sites unable to be processed due to technical complexities of trying to extract spodumene efficiently. Yet, the silver doughnut still include these numbers as supply numbers that tip the market into oversupply.
"This rampant oversupply problem convinced us since last year that lithium is the most obvious short in the commodities world – indeed, such an extremely bearish outlook is rarely seen. These concerns were slow to percolate through to many of the investors into the space, however, and we suspect that some of this has stemmed from the different approaches taken by commodities and chemicals industry analysis. Fans of the EV story have been keen to buy into Albemarle or SQM, but had been less aware of the threat posed by rapid growth from Australia, until very recently where we have seen share prices take a tumble."
Again, another big statement by the doughnut. But they fail to recognise the Australian Li producers have not ever traded at the same valuations as their US peers. There has always been a mismatch in valuations that suggested a re-balance was on the cards.
"Overall we see the surplus growing from 103kt in 2017 to 170kt this year, and peaking next year at 253kt. If we are correct and the mass of raw material outside the Chinese converters begins to move through the chain, the pressure will increase, and the correction in LCE prices we expect could be extremely sudden. We continue to call for sharp downside to prices, looking for $10,250/t this year, slipping further to $7,375/t next year on average."
This is an issue if you don't have long term supply agreements in place. Mt Cattlin has a 5-year agreement for its production so this is a non-event. The pricing for JB and/ or SDV will also be locked in for some time so any thoughts of temporarily ow spot pricing actually affecting the company valuations is unrealistic and (quite frankly) fear mongering.
Get ready for some more short term volatility in the GXY share price. It will provide huge opportunities for those that can see through the misinformation being put in the marketplace by so-called analysts.
Now is not the time to panic.
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