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Commodities

Lithium prices to fall further as new supply arrives, says E&P

Joanne Tran

Broker E&P expects lithium prices to declinefurther in the coming years amid an imminent surplus of the battery mineral asmore lithium mines around the world come into production.

The broker said its base case spodumene pricewas in line with consensus for this financial year, but forecast a morepessimistic outlook beyond that.

It predicted the value of spodumene at $US3475 atonne this financial year, $US2200 a tonne in the 2025 financial year and$US1800 a tonne in the 2026 financial year.

The industry expects it to reach about $US2500 atonne long term, but E&P’s forecast was just $US1500 a tonne.

Spodumene prices hit more than $US6000 a tonnelate last year before falling back early this year, having seen off‘‘unprecedented’’ demand growth.

Australian producers are generating ‘‘a lot ofcash flow’’ and prices are still between two and three times long-run averages,after declining at the start of 2023 following a slowdown in electric vehiclesales in China, E&P analyst Adam Martin wrote in a note to clients.

E&P forecast the drop in prices wouldreflect supply and demand balancing out this financial year before the marketentered a period of surplus in 2025 to 2027.

‘‘Commodity prices don’t move gradually orlinearly, so it is quite possible any price decline is sudden and volatile,’’Mr Martin said.

‘‘The key challenge for equity investors isforecasting how prices might decline over the medium term, given balance sheetand cash-flow implications,’’ he added.

IGO was the only producer out of three – theothers being Pilbara Minerals and Mineral Resources – that the broker endorsedwith a ‘‘positive’’ recommendation, with expectations that IGO stock wouldoutperform the benchmark S&P/ASX 200 over the next two years. Its pricetarget is $16.10.

E&P said its earnings forecasts for thethree miners were ‘‘below consensus’’, although its IGO numbers appeared theclosest to the street’s.

That, combined with share price underperformanceand its joint venture position in ‘‘one of the best’’ lithium deposits,Greenbushes, supported its bullish call on the stock, it said.

‘‘This relative recommendation reflects slightlylower lithium price forecasts, recent relative equity performance at IGO, astrong balance sheet and ownership of a very low-cost lithium asset.’’

E&P cited the IGO share price weakness as aresult of the writedown at the Cosmos mine issued last month. It added that IGOwas in a better financial position than rivals Pilbara Minerals and MineralResources. All three players planned to double production and keep their‘‘dominant’’ position in the global lithium market, according to E&P.

The broker is betting on mergers andacquisitions to drive the value of the industry as it matures, and namedPilbara Minerals as an obvious target in the short term because of its stockprice performance, large net cash position at $3 billion, and single assetfocus.

Its shares have soared 42 per cent to $5.18 thisyear.

Despite Pilbara Minerals’ strong performanceover the past 18 months, the broker says the industry’s view of the stock as apure play on lithium pricing with strong cash capacity is a risk to itsperformance should lithium prices fall.

Pilbara Minerals has a ‘‘neutral’’recommendation and is expected to perform in line with the benchmark index,with a price target of $4.90.

Meanwhile, E&P said the market was ‘‘toobullish’’ on Mineral Resources’ ramp up in production, and potentially ‘‘toolow’’ on its production costs.

It said Mineral Resources, in the medium term,could be ‘‘one of the better exposures’’ to lithium and other commodities suchas iron ore and separately mining services income.

The execution of its projects was ‘‘paramount’’as Mineral Resources’ balance sheet was more leveraged than its peers, invitingrisk should commodity prices fall.

E&P has a ‘‘neutral’’ recommendation onMineral Resources, which closed yesterday at $69.42 a share. E&P’s targetis $71.

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