Experts in the field weigh in on Goldman Sachs' lithium oversupply call and whether they think it accurately depicts what's happening in the market.Last week, the lithium market was shaken by a report from investment bank Goldman Sachs (NYSE:GS) saying that the bull market for battery metals is over for now.According to analysts at the firm, prices for lithium, which have increased more than 400 percent in the past year, are expected to drop in the next two years, with a “sharp correction” happening by 2023.They project that lithium prices will fall to an average of just under US$54,000 per metric ton (MT) this year from an average of above US$60,000. By 2023, the bank's forecast is for an average of just over US$16,000.There’s been “a surge in investor capital into supply investment tied to the long term electric vehicle (EV) demand story, essentially trading a spot driven commodity as a forward-looking equity,” the group said. “That fundamental mispricing has in turn generated an outsized supply response well ahead of the demand trend.”Analysts at Goldman Sachs said investors are fully aware that battery metals will play a crucial role in the 21st century's global economy. “Yet despite this exponential demand profile, we see the battery metals bull market as over for now,” they commented, adding that the long-term prospects for the sector remain strong.Goldman Sachs report misses market fundamentalsFollowing the report's release, lithium analysts and experts shared their concerns over a call that they say ignores the fundamentals of the battery metals market.Commenting on the predictions from Goldman Sachs, Rodney Hooper of RK Equity told the Investing News Network (INN) he strongly disagrees with the analysts' findings on both supply and demand.“My biggest issue with the report is that it will discourage upstream investment in mining,” he said. “We clearly haven't seen sufficient upstream investment to meet current and future demand.”Also speaking with INN, Daniel Jimenez of iLi Markets agreed, saying that analysts at the investment bank are overestimating supply and underestimating demand — Goldman Sachs analysts are expecting global demand of around 1.2 million MT of lithium carbonate equivalent (LCE) by 2025.“We think that lithium producers have better industry insights and truthful talks with most of the original equipment manufacturers (OEMs) they supply,” Jimenez said. Top lithium producer Albemarle (NYSE:ALB) is calling for around 1.5 million MT LCE, while Chinese giant Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460) is expecting around 1.6 million MT during the same period.“On the supply side they are extremely optimistic in terms of the lepidolite production that could come from China in the coming years, which is also not realistic,” Jimenez said. “Bottom line — we believe it will be just the contrary.”Similarly, analysts at Benchmark Mineral Intelligence said the industry cannot rely on China’s feedstock to meet the needs of the market.“Known domestic Chinese spodumene and other hard-rockresources are low quality, a key reason why there has been an increasing reliance by Chinese converters on Australia for supply instead,” analysts at the firm said in a note released soon after the comments from Goldman Sachs. “China’s deposits of lepidolite may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply.”Lithium market forecasting not an easy taskGoldman Sachs is not the first big bank to have its analysis called out by experts in the lithium field. Back in early 2018, when prices for the commodity had been on the rise for a couple of years, Morgan Stanley (NYSE:MS) predicted a decline by 2021, with escalating fears of oversupply in the market.“We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the lithium mine level potential and make an oversupply call ... the speciality chemicals world is more nuanced than iron ore,” Benchmark Mineral Intelligence’s Simon Moores said in a tweet when the Goldman Sachs report came out. “It’s why the world doesn’t rely on investment banks for research any more.”Predicting how the lithium market will perform in coming years is not an easy task. As a specialty chemical, not all lithium is created equal, and not all auto and battery makers have the same needs. There are countless constraints to bringing supply into the market, and as analysts often point out, delays are common for new projects, as well as for producers that are expanding their existing operations.Hooper said some analysts tend to get both demand and supply wrong. “The best indicator of battery-grade demand is cathode production,” he said. “Historical analysis shows that demand linked to cathode production has the highest correlation to lithium prices — this indicator flagged a demand/supply deficit in late 2020.”When assessing the supply side of the equation for lithium, Hooper does not consider projects until they are fully permitted, financed and under construction. And even then, he allows for a long ramp-up phase and qualification timeline, especially if he's looking at a greenfield project.“What happens when you use these indicators is that cathode production brings demand forward six months, and supply adjustments push qualified material out six to 12 months,” he explained. “The net result is a structural deficit as analyst forecasts of the supply/demand balance in the market are out by 12 to 18 months.”In a market like copper, that could mean a few percentage points worth of total demand, Hooper added, but in a market such as lithium the difference is “enormous.”Commenting on the biggest challenge for analysts in determining what will happen in lithium, Jimenez, who before iLi Markets worked at top lithium-producing company SQM (NYSE:SQM), said it's clear there are excesses in terms of predicted capacity increases and production ramp-up times.“Feasibility reports are, based on past experience, very optimistic,” he said. “Furthermore, the confidence that new technologies or resource types will be able to deliver are overly optimistic. In many cases, we are talking of unproven technologies that have not been scaled from lab to industrial yet.”Is the lithium market really facing oversupply?At the end of last year, INN talked to lithium market watchers about the outlook for the commodity, with most agreeing that demand will outpace supply on the back of EV sales.What has changed since then? Experts say not much.For Benchmark Mineral Intelligence analysts, the lithium market will remain in structural shortage until 2025.“The lithium market will balance over the next few years, but it’s unlikely that an unprecedented ramp-up of marginal, unconventional feedstock will fill the deficit. It is also unlikely that demand will weaken significantly.”Similarly, iLi Markets' Jimenez doesn’t think supply will be able to catch up with demand at least until 2026 to 2027, mainly because of the difficulty of bringing greenfield projects into production at full capacity.“Over this period of time, lithium should be the limiting factor in EV sales,” he explained to INN. “Even with demand growing very strongly, the investments the industry is making today might yield additional capacity in six to 10 years from now that we are not able to see today.”RK Equity’s Hooper echoed these thoughts. “Aggregate supply may match demand in the years to come; however, battery-grade supply qualified into the battery supply chain won't match EV demand,” he said.“If OEMs continue to ignore battery raw material supply risks, they will pay the ultimate price soon enough. Signing meaningless binding (but not really binding) lithium offtake agreements with no associated capital flows or permitting assistance attached to them will lead to disappointment.”As EV demand from around the world enters its rapid growth phase, lithium quality will be critical.“We haven't seen sufficient upstream investment to cause oversupply for some time,” Hooper said. “The only way we see the market being balanced in the near future is if there is EV demand destruction, and that is unlikely.”Lithium prices expected to remain at steady levelsThe lithium price rally has made news headlines around the world since 2021, with Evy Hambro of BlackRock (NYSE:BLK), the world's largest asset manager, talking about the essential need for lithium into the future as part of the group of metals needed for the green energy transition.Lithium pricing is usually a common concern for investors new to the space, with experts generally reminding anyone interested in the battery metal that there’s no single lithium price. Lithium traded at spot prices only reflects a portion of the market; most is locked up in contracts, which in some cases include fixed pricing.Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark Mineral Intelligence.“Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now,” analysts at the firm said.Structurally, prices will remain high through 2025 to 2026, at least, iLi Markets' Jimenez said. “Now high means above US$40 per kilogram, which is significantly higher than the incentive price to develop a marginal-cost greenfield project,” he said. Whether the price will be U$40, U$60, U$80 or U$120 is a difficult call to make.For the expert, each year the industry will need to grow supply by more than 200,000 MT of LCE per year, which was the total demand seen in 2017. “The possibility that greenfield projects suffer delays is high,” Jimenez said. “Probably lithium units will be the bottleneck of the lithium-ion battery supply chain.”China’s measures to contain COVID-19 have recently hit EV sales, and as a result the need for lithium, although this pullback in lithium demand is seen as temporary. “When EV demand resumes in H2 2022, as China lifts restrictions, I expect spot and contract pricing to remain firm,” Hooper said.Even for Wood Mackenzie analyst Allan Pedersen, who sees lithium prices declining by the end of 2022, a “sharp correction” like the one expected by Goldman Sachs is not coming. “We do not forecast a sharp correction, but more a 'softer landing' as demand remains strong, providing a cushion for prices,” he told INN.The research firm is expecting additional supply to enter the market both from brine and mineral concentrates; this will increase supply beyond demand in the short term.“It is worth noting the surplus is fragile and small changes in EV forecasts can have a significant impact on the demand for lithium, and therefore on the market balance,” he said. “We forecast that the supply surplus for battery-grade lithium chemicals will be less than the market in general, as producing high-quality, battery-grade lithium chemicals is difficult.”Growth in the lithium industry is happening at a rapid pace, with changing market dynamics expected to emerge.“As the market wrestles between long-term supply security to fuel the lithium-ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning,” analysts at Benchmark Mineral Intelligence said.Lithium stocks hit — now what?Following last week’s Goldman Sachs report, the top lithium producers and other players saw their share prices plunge. Chile’s SQM was down 5 percent, while rival Albemarle declined more than 7 percent and Argentina-focused Livent (NYSE:LTHM) fell around 14 percent.Despite the recent slump, looking at how lithium stocks have performed in the past year paints a different picture — many lithium stocks in the US, Canada and Australia are up year-on-year on the back of improved market conditions, as the price rally for the battery metal has brought many investors to the space.For RK Equity’s Hooper, there is still value in the current market. “My suggestion would be to look at current or near-term producers that have been hit in the latest downturn,” he said. “Shares that are pricing in spodumene or chemical prices that align with Goldman Sachs outlook — which by 2023 sees spodumene concentrate at US$1,100 and lithium carbonate ex-VAT at US$15.6k/t. We see 2023 average pricing well above those levels.”Giving his best suggestion for generalist investors who have jumped to the lithium market in recent months, Hooper said they would do well to look at history and decide for themselves how supply and demand will evolve.“Will internal combustion engine vehicles sell in any great volumes after 2025 to 2027 given legislation and consumer preferences?” he said. “Then load in a realistic long-term price for lithium chemicals and decide if the company has a low enough valuation multiple and some room for error.”
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