More pain tipped for lithium stocks as rout takes hold

Alex GluyasMarkets reporter

Jul 2, 2024 – 1.25pm

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Brokers are warning that the plunge in lithium is not yet baked into stock prices, spelling more trouble for the Australian sharemarket’s worst performers over the past year.

It comes as the price of spodumene fell below the key $US1000-a-tonne level for the first time since March, according to S&P Global Platts. At $US970 a tonne, prices have now dived 88 per cent from the record highs above $US8000 a tonne reached in 2022.

Pilbara Minerals in Western Australia is the most-shorted stock on the ASX. The New York Times

The swift decline has been fuelled by concerns about a mounting supply glut of the battery metal, which has coincided with disappointing demand for electric vehicles, leaving the physical market in a surplus.

That combination saw the S&P/ASX 200’s lithium sector crash in the 2024 financial year, with developer Liontown Resources ranked as the worst-performing stock on the index, plunging more than 60 per cent. IGO and Arcadium Lithium ranked second and fourth, respectively.

But analysts have warned that the beaten-down lithium shares still look expensive, with UBS estimating that equities are pricing in spodumene at around $US1200 to $US1480 a tonne, which is well above spot prices.

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And investors agree. Pilbara Minerals, Liontown Resources and Sayona Mining are all among the benchmark index’s 10 most-shorted stocks.

“With a view that lithium markets remain well to over-supplied, we expect prices to stay lower for longer,” UBS analyst Levi Spry said. The broker said it still rated the producers a sell “where valuations still appear stretched”.

Chorus of bears

UBS is the latest investment bank to slash its lithium price forecasts, joining Citi’s bearish outlook last week, as the broker priced in a fresh wave of supply set to hit the physical market in coming years.

This includes additional output from Yahua’s Kamativi mine in Zimbabwe, and the potential contribution from the Manono mine in the Democratic Republic of the Congo. Chile’s SQM could also target extra sales this year, while Pilbara Minerals’ expansion of its Pilgangoora operation will pump new supply into the market from 2029.

Wood Mackenzie believes the oversupplied market will keep lithium prices under pressure until 2028, when its analysts expect spodumene to bottom at around $US1000 a tonne.

Expectations of a prolonged downturn have already forced some producers to cut costs and raise capital just to stay afloat.

Mining hopeful Lake Resources became the latest victim this week, telling investors on Monday that it will have to slash jobs and sell assets as it faces lower commodity prices. Meanwhile, Liontown Resources announced on Tuesday it has secured $379 million in funding from South Korean battery conglomerate LG Energy Solutions.

Analysts warn that more lithium businesses will face a similar fate and be forced to shut down projects to help tip the physical market back into a deficit.

“Because there’s been such a massive increase in supply over the past three years, a lot of that has been quite high cost, but as the industry matures, you’re seeing more production come on towards the bottom end of the cost curve,” said Sam Berridge, portfolio manager and resources specialist at Perennial Funds Management.

Flagging demand

“And so those high-cost projects will just get pushed off the end of the cost curve and prices will come down to a point where they become sub-economic.”

The other issue plaguing lithium markets is the softer-than-expected demand for EVs, particularly in the US and Europe.

While EV sales in China rose by 37 per cent in the first quarter compared to the prior year, Europe and North America recorded just a 6 per cent and 9 per cent increase respectively, according to Bloomberg New Energy Finance.

It means global EV sales are on track to rise just 19 per cent in 2024, which would mark the slowest pace of growth since 2019.

Indeed, global EV sales expectations have been hit by high interest rates, a lack of charging infrastructure and limited product options for consumers, which has caused Citi’s global auto team to downgrade their EV adoption forecasts twice in the past nine months.

“A reset in the EV expectations has had a pronounced impact on lithium balances,” said Citi’s global head of commodities research, Max Layton.

Morgan Stanley believes even lower lithium prices are needed for EV demand to recover outside China.

While the big fall in prices has caused EVs in China to be at parity with, or even cheaper than, internal combustion engine alternatives, the opposite is happening across the rest of the world.

Indeed, car prices are needing to fall to recover pre-pandemic volumes, which means that EVs are now selling at a 15 per cent price premium, making them less appealing to consumers.

The Western adoption of EVs is also being stifled by a rollback of targets and support such as the US slowing its EV adoption from 67 per cent by 2032 to 35 per cent.

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