Positive signs for the segment, see article in AFR today;Plenty of spark left in lithium’s bullish run
A perfect storm of significant undersupply and roaring demand for electric vehicles has analysts declaring the market for the metal has officially turned a corner.
Alex GluyasMarkets ReporterJul 14, 2021 – 12.01amIt has been a bumpy ride for investors in lithium over the past few years as they chase returns from the seemingly elusive electric vehicle (EV) revolution.
But analysts believe the market for the commodity has officially turned a corner, and say investors should fasten their seat belts as the EV boom accelerates.
A sharp increase in demand for electric vehicles is driving lithium prices higher. Bloomberg
Patience is paying dividends as an abrupt surge in lithium prices has sent valuations soaring in recent months for some companies that have exposure to the metal.
“Lithium prices have risen sharply since February and we do not believe it is temporary,” Credit Suisse research analyst Matthew Hope says.
“The lithium supply glut has ended and the market is now tightening as the electric vehicle revolution accelerates, [meaning] supply will need to stretch to meet demand.”
A growing disparity between supply and demand is emerging as countries around the world step up their decarbonisation commitments. Analysts say it could take years for the significant lack of supply to turn around.
So stark is this imbalance that Credit Suisse forecasts supply from new, unapproved projects will have to rise 50 per cent by 2025. This is needed to meet the growing demand, which the investment bank’s analysts expect to triple from 2020 levels by the same deadline.
Growing deficits
“The mines and salt lakes currently producing, together with those under construction, and idle operations that can be restarted, are insufficient to meet demand and will see growing deficits,” Mr Hope says.
The issue facing the market is that lithium projects, depending on the type, take at least one year to come online. So even if an abundance of new operations was announced, the impact would not be felt until the middle of next year at the earliest.
Recognising this, analysts are sharply increasing their price projections for lithium carbonate and hydroxide – the two forms of the commodity used in electric vehicles and their lithium-ion batteries.
This month, Macquarie upgraded its price forecasts for the pair by 6 to 13 per cent by 2025.
It particularly singled out spodumene – a popular source of lithium, given its lower production costs and certainty of supply – as a big beneficiary.
Change in fortunes
“The lack of independent supply for third parties should see spodumene remain tighter than other lithium markets,” the Macquarie report says.
Analysts subsequently upgraded their spodumene price forecasts by 7 per cent for this year, 30 per cent next year and 17 per cent for 2023.
The current backdrop stands in stark contrast to the oversupply that plagued the market just two years ago, which was a drag on prices and stocks operating in the sector.
But investors who held their nerve through the lows are now seeing the electrification theme blossom into an increasingly high-performing area of the market.
“What was a concept story a few years ago, is all of a sudden real now,” says co-portfolio manager of Ausbil’s global resources fund, James Stewart.
“Over the next six to 12 months, in particular, we can’t see significant lithium volume coming online to meet the phenomenal demand for electric vehicles we’re seeing across Europe, China and the US.”
More returns to come
Indeed, the recent growth of new energy vehicles (NEVs) has been fuelled by toughening environmental regulations and the rollout of government stimulus following the COVID-19 pandemic.
This helped increase the global market penetration of NEVs from 7 per cent in 2019 to 11 per cent in 2020. Credit Suisse forecasts this figure will reach 34 per cent by 2025.
A significant portion of this demand is expected to come from Europe, where analysts predict the region’s NEV share will reach 97 per cent by 2030. Japan at 79 per cent, North America at 59 per cent and China at 67 per cent are expected to be the other key sources of demand.
The lithium sector has provided a windfall of returns over the past year as this supply-demand dynamic has played out and pundits believe it will not end any time soon.
Asset manager ETF Securities says inflows into its Battery Tech and Lithium exchange-traded fund accounted for more than 36 per cent of total inflows this year to June. As of July 7, the fund returned 73.5 per cent over the previous year, making it Australia’s best-performing ETF for the year.
Pure-play lithium producer Pilbara Minerals returned 522.6 per cent in the 2021 financial year – the second-highest of any stock on the S&P/ASX 200.
Lithium carbonate supplier Orocobre produced the fifth-best returns at 180.1 per cent during the period. The stock is the Ausbil Global Resources Fund’s heaviest long position with an 8.4 per cent weighting.
Analysts believe there are more returns to come from many companies.
Macquarie has an “outperform” rating on five of the big lithium players on the ASX: Mineral Resources, IGO, Pilbara Minerals, Orocobre and Galaxy Resources.
Its pick of the bunch is Mineral Resources, for which it has a price target of $76. The stock was trading at $60 on Tuesday afternoon.
Macquarie also sees further gains ahead for Pilbara Minerals, attaching a price target of $1.80 to the stock. It was trading at $1.56 on Tuesday afternoon.
And just last week, Goldman Sachs upgraded IGO to a “buy” and increased its target price to $9.30. The stock was trading at $8.62.
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