This fund is betting Wall Street banks have lithium slump call wrong

Sarah JonesMarkets Editor

Apr 5, 2024 – 11.44am

The market’s bearish forecast of a chronic oversupply of lithium is wrong, according to one major fund manager which expects an emerging deficit in the green metal.

Ethical Partners’ proprietary model suggests the global market for lithium is moving “rapidly back” into balance and could even be undersupplied – at odds with the view of major investment banks including Goldman Sachs and Citi.

Pilbara Minerals’ lithium mine in Western Australia. The company has warned that a fall in lithium price means shareholders shouldn’t expect a dividend in the first half of the year. The New York Times

The price of battery metals collapsed last year – sending lithium down as much as 80 per cent from its peak – amid concerns of too much supply and weaker-than-expected demand for electric vehicles.

In turn, that has depressed the share prices of some of the largest miners in the sector, including Pilbara Minerals and Liontown Resources.

In the boom times, lithium carbonaterose from $US15,000 a tonne in 2021 to over $US80,000 a tonneas battery manufacturers rapidly stocked inventories to avoid even higher prices.

That brought more miners, and supplies, into the market, making some otherwise uneconomical projects profitable at those prices.

Ethical Partners’ data is brd on company filings, including during the earnings season, where almost all Australian lithium miners adjusted their production outlooks, and multiple one-on-one meetings with the producers globally to hear “from the horse’s mouth” about plans to limit production and other cost-cutting measures.

“Since November, we believe the lithium market has moved from an 8 per cent surplus in 2024 to roughly in balance,” said Sam Cox, an analyst at Ethical Partners.

“While demand will still be a key driver of price direction from here, we see green shoots … The market has yet to identify this trend, and is still looking backwards.”

Of all the lithium producers they speak to, Ethical Partners owns just IGO because it’s the only company in the sector with positive cash flow. They have been topping up through the lithium rout.

Even so, the shares are still off some 19 per cent this year alone.

“From 2021 to 2023, lithium supply almost doubled,” Mr Cox said.

“We estimate a quarter of this supply came from sources not producing in 2020.”

But that dynamic, he said, had now corrected with balance sheets healthier, unprofitable projects mothballed and prices starting to recover. Lithium carbonate, for example, is up about 10 per cent year to date.

He added that much of the supply expected to hit the market this year and next came from China and Africa – which often didn’t materialise.

Unlike Australia, China has more lepidolite, a lower grade ore that can be turned into lithium but at a much higher cost.

REBOUND DISMISSED

Even so, some of the largest brokers in the United States have dismissed the rebound in the lithium price as short-lived. Goldman Sachs in early March warned against misconstruing the recovery as marking the end of the bear market.

They predicted that the price of lithium carbonate would slump a further 25 per cent over the next 12 months because of the still significant pipeline of supply, which would hit the market just as demand for electric vehicles was downgraded.

Citi’s commodities team more recently suggested traders should be taking profits as the physical market tips into a large surplus over the coming 18 months.

According to Citi, while around 100,000 tonnes of output has been cut already, another 100,000 tonnes was still needed to be slashed to balance the market.

It added the current rally in lithium prices would only further delay the necessary supply cuts.

Further, the broker forecast that more than two million electric vehicles beyond their br case would need to be produced this year and in 2025 to clear the lithium market of excess supply – a scenario Citi said was “highly unlikely”.

EV DEMAND ‘QUITE HEALTHY’

But Ethical Partners’ fund manager Nathan Parkin said demand for electric vehicles was “quite healthy” and the “noise” about it weakening was coming from the US, when the vast majority of EVs were produced and sold in China, followed by Europe.

Mr Parkin said the same Wall Street banks were also servicing the hedge fund community which in Australia, at least, are aggressively betting against the sector.

Lithium producers are still among the most shorted stocks on the ASX.Pilbara Minerals, for example, still has more than 20 per cent of its shares held by short sellers.

“I’m being a bit cynical but part of the reason as to why they are bearish … is the fact that 20 per cent of Pilbara is short and the [banks] run massive trading business, which usually feeds into the view around where they stand on commodities,” said Mr Parkin.

“Our view is that the market is in deficit now.”

Sarah Jonesis the markets editor at The Australian Financial Review. She is brd in the Sydney newsroom.Connect withSarahonTwitter.EmailSarahatsa.jones@copyright link