Lithium gets the breather it needed

The correction in lithium stocks after a white-hot run should remind investors the sector remains exposed to the age-old questions of supply and demand.

Jun 2, 2022 – 12.03pm

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When you stop and think about it, the similarities between the crypto world and the lithium sector are fascinating.

The massive financial gains investors in these asset classes have enjoyed in recent years is the most obvious similarity.

And both sectors also have a certain opaqueness about them; in crypto, it can be very difficult to see who is on the other side of a trade, while in the lithium sector, pricing has been historically woolly.

The lithium bull run is on a pause, says Goldman Sachs. David Rowe

But as lithium share prices plunged on Wednesday around the world following bearish price forecasts by Goldman Sachs, another similarity between crypto and lithium was made clear – the cult-like ability of bulls to dismiss different views.

Social media lit up with lithium fans accusing Goldman Sachs of everything from gross incompetence to market manipulation. Lithium investors urged each other to hold their stocks – although unlike crypto bulls, they at least spelt the word correctly.

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If nothing else, this episode should highlight the dangers of passion and emotion in financial markets.

After an incredible run in which lithium prices have surged 12-fold since 2020 and share prices have followed suit – local champion Pilbara Minerals was up eight-fold before Tuesday’s sudden correction – even the most bullish investors could have seen the market was ripe for a pullback for one reason or another.

This is surely a good moment for investors – particularly the generalists that have moved into the sector in the last 12 months – to take stock and consider where the lithium story goes next.

Move back to supply deficit

Two things roiled the market on Wednesday: the Goldman report suggesting oversupply would see lithium prices fall by as much as 73 per cent in calendar 2023, and news that Argentine customs will set a reference price for lithium carbonate exports after discovering export irregularities.

The changes in Argentina should have little to no impact on the market given, as Citi says, it is “not a floor or ceiling price, nor will it change the prevailing royalty regimes”.

The question of whether potential oversupply weighs on lithium prices as Goldman suggests also needs to be seen in context.

First, Goldman isn’t predicting lithium’s bull run is over, but will see a temporary pause; indeed, the bank sees lithium markets moving back into a supply deficit by 2024.

“It is important to note that this phase of oversupply will ultimately sow the seeds of the battery materials super cycle over the second half of this decade, in our view, where the demand surge will more sustainably overcome current supply growth,” analyst Nicholas Snowdon says.

Second, Goldman’s prediction of oversupply next year is highly contested.

Electric vehicle demand looks set to continue to grow rapidly in the next few years and out to 2030. Bloomberg’s commodity forecasting division, called BloombergNEF, this week released new projections suggesting sales of EVs will hit 20.6 million in 2025; just 12 months ago, its 2025 forecast was for 14 million sales.

With energy prices soaring around the globe, some lithium experts expect demand from stationary storage – think energy storage batteries of all shapes and sizes – will also grow exponentially over the coming decade, with demand already rising off a low base.

At the same time, many see Goldman’s view on supply as overly optimistic. Lithium projects don’t have a great record of being developed on time (or on budget) and several lithium juniors are pinning their hopes on extraction techniques that are far from proven.

Strong demand and soaring prices is bringing on a lot of new supply, but as one long-time student of the sector says, everything will have to go right for oversupply to emerge in the next few years.

“It’s almost impossible to see that supply coming on in an orderly manner.”

So Goldman’s view – perhaps best summarised as a tough few years for lithium prices followed by a strong second half of this decade – is far from universally held. The story of rising demand for lithium, from EVs particularly but also from stationary storage, is still very much intact.

Nevertheless, Goldman’s forecasts – and the market reaction to them – do serve as a reminder that the surging high prices that have fuelled the big gains in lithium stocks over the last two years will do their job and incentivise new supply.

Lithium bulls think about the supply and demand balance over the longer term. They also consider the view of the world’s biggest miner on lithium. BHP has consistently made the point that lithium is not a scarce resource.

“We recognise that at the moment there’s short-term supply-demand conversations,” BHP’s Minerals America boss Rag Udd said in an interview early in May. “How that plays out over the next 20 or 30 years, I don’t think it will last.”

Lithium’s bull run isn’t necessarily over, but investors should recognise that while lithium might have felt like crypto in recent years, this is still the resources sector. Supply and demand dynamics matter and should be considered carefully – especially after a price surge that has left the sector vulnerable to corrections.