Li-related News/Articles/Reports, page-8921

The lithium market is currently characterized by an imbalance between supply and demand, driven by a slowdown in electric vehicle (EV) demand and an influx of new supply. Major broker reports from Morgan Stanley, Citi, and UBS highlight a bearish outlook in the short term, emphasizing the necessity for significant price reductions to rebalance the market. The recurring trends in stock prices point to weak demand outside China and an oversupply situation that has led to sharp price declines. This report provides a comprehensive analysis of the current market dynamics, key factors affecting lithium prices, and investment scores for both short-term and long-term perspectives. While the short-term outlook remains challenging, the long-term prospects are more favorable due to anticipated growth in global EV demand.

1.Key Points from Major Broker Reports

Morgan Stanley:

Lithium oversupply may take some time to rebalance. Source: Wood Mackenzie, Morgan Stanley Research. (From: “Lithium views from Las Vegas Conference”, Morgan Stanley Research, 1 July 2024)

Morgan Stanley has highlighted an improving risk-reward scenario for lithium but emphasized that the market has not yet reached equilibrium. Key factors include a demand slowdown in electric vehicles (EVs) and a significant increase in supply without substantial project closures. Morgan Stanley projects that lithium carbonate prices need to drop to $8,000-$10,000 per ton to trigger necessary supply reductions and market rebalancing. They note that many producers, especially those of spodumene, are not profitable at current prices, suggesting potential closures if prices fall further.

Lithium prices need to get lower into the cost curve to rebalance S/D and drive a new cycle. Source: Morgan Stanley Research (From: “Lithium views from Las Vegas Conference”, Morgan Stanley Research, 1 July 2024)

Citi:

Citi remains bearish on the lithium market, forecasting that only mine closures and industry rationalization can resolve the current excess supply. Visible inventories have risen significantly, and Citi anticipates a further 15-20% drop in prices to about $10,000 per ton. They argue that persistent lower prices are necessary to rebalance the market, which would likely result in mine and converter closures.

Persistent lower prices are needed to rebalance the market. We estimate some non-integrated converters to be loss-making at current prices. Source: Citi Research, Company Reports, Bloomberg. (From “Metal Matters, Lithium in freefall, visible inventories rising at a dramatic pace, remaining very bearish near term”, Citi Research, 25 June 2024.

UBS:

UBS forecasts prolonged surpluses in the lithium market, expecting prices to stay lower for an extended period. They attribute this to weak demand outside of China and continued new supply entering the market. UBS has adjusted their price forecasts downward and remains underweight on ASX lithium stocks, retaining sell ratings on companies like Pilbara Minerals, Mineral Resources, and IGO due to increased uncertainty on long-term demand and opaque near-term supply additions .

2. Reoccurring Trends in Stock Prices

1. Demand-Side Factors:

- EV Market Slowdown: A notable trend is the slowdown in EV demand, which impacts lithium demand directly. This slowdown is partly due to the price premium of EVs over internal combustion engine vehicles, which needs to be reduced to drive higher adoption rates .

- Weak Ex-China Demand: Outside China, the demand outlook is weak due to stagnating EV penetration rates and increased protectionism by western nations .

2. Supply-Side Factors:

- Supply Surplus: The market is experiencing a supply glut, with significant new supply coming online faster than anticipated. This oversupply has led to a sharp decline in prices from their previous highs .

- Production Costs: The average cost of lithium carbonate production is around $12,263 per ton, but market prices need to fall to $8,000-$10,000 per ton to push unprofitable producers out of the market, thereby rebalancing supply and demand .

3. Price Projections:

- Morgan Stanley and Citi project that prices need to fall to around $10,000 per ton to achieve market rebalancing, potentially driving mine closures and reducing excess supply.

- UBS has lowered its price forecasts significantly for the coming years, predicting sustained low prices due to ongoing supply surpluses and weak demand .

3. Investment Scores

Short-Term Investment Score: 50-40/100

The short-term outlook for lithium investments remains challenging due to the current oversupply and falling prices. The bearish views from major brokers like Citi and UBS, along with Morgan Stanley's call for further price declines, suggest caution. Short-term investors may face volatility and potential losses as the market seeks a new equilibrium.

Long-Term Investment Score: 70-60/100

In the long term, the outlook improves slightly due to the anticipated growth in global EV demand and potential future supply constraints once the market rebalances. However, the path to this rebalancing involves significant market adjustments and potential closures of high-cost producers. Investors with a long-term horizon may benefit from eventual supply-demand alignment and renewed price increases, but should be prepared for sustained volatility.

Overall, while the long-term fundamentals of the lithium market remain strong due to the expected rise in EV adoption, the short-term risks and current market conditions necessitate a cautious approach.

Conclusion

The lithium market is facing a critical period of adjustment, with major broker reports uniformly pointing to an oversupply and weak demand scenario. The necessary market rebalancing will likely require lithium carbonate prices to fall to $8,000-$10,000 per ton, triggering supply reductions through mine closures and industry rationalization. Short-term investment in lithium remains risky due to the potential for further price declines and market volatility. However, the long-term outlook is somewhat optimistic, supported by the anticipated rise in global EV adoption, which should eventually drive demand higher and stabilize prices. Investors with a long-term perspective may benefit from this eventual alignment, but must be prepared for sustained market fluctuations and a challenging adjustment period.