https://www.afr. com/markets/commodities/lithium-stocks-roar-back-as-short-sellers-scramble-on-mine-closure-20240911-p5k9rs Lithium stocks roar back as short sellers scramble on mine closure Alex GluyasMarkets reporter
Sep 11, 2024 – 3.31pm
An army of hedge funds targeting ASX-listed lithium stocks are scrambling to cover their aggressive short positions following reports that Chinese electric vehicle battery maker CATL has suspended production at a major operation in China.
Shares of Pilbara Minerals and Liontown Resources – both in the top five most shorted stocks on the ASX – soared more than 13 per cent on Wednesday amid speculation that the mine closures will pull supply out of the market, boosting lithium prices.
Investors are waiting for more supply to be removed from physical markets. The New York Times
UBS analyst Sky Han said CATL had suspended its lepidolite operation in Jiangxi following a meeting on Tuesday where she cited “channel checks” with several contacts. The broker estimated that the closure could cut about 8 per cent, or 5000 to 6000 metric tonnes, of China’s monthly carbonate production.
“After making a loss for two months in lithium business and continuous downside risk on lithium price, we finally see normal supply response from a marginal-cost producer,” Ms Han wrote in a note to clients.
Carbonate futures in China jumped 5.6 per cent to about 75,500 yuan per tonne on Wednesday, sending the ASX’s beaten-up lithium stocks on a tear. Mineral Resources surged 16 per cent to $35.12, Liontown Resources jumped 13.1 per cent to 69¢ and Pilbara Minerals climbed 13.1 per cent to $2.67.
The share moves were exacerbated by traders covering short positions. Pilbara Minerals has long been the most shorted stock on the Australian sharemarket, while short positions in MinRes are at record levels.
“The rally we’re seeing today is almost 100 per cent short covering,” said Tribeca portfolio manager Ben Cleary. “Supply coming out of the market is exactly what the lithium market needs, so there is plenty of room for this rebound to run given how hard the stocks have been hit.”
Destocking accelerated
Lithium prices have dived to the lowest since 2021 as soft demand from China and waning appetite for electric vehicles collided with an oversupply of the battery material, leading to elevated inventories.
But news of CATL’s mine suspension has brightened hopes that the physical market is approaching equilibrium, particularly given lepidolite production has been cut by 14 per cent from a peak in recent weeks, according to Citi.
“We see near-term sentiment uplift to lithium prices, helped too by the traditional September-October peak season,” said Citi analyst Jack Shang. “These should accelerate the lithium destocking process as well.”
CLSA analyst James McIntosh warned that CATL may resume production once prices rose slightly, but added that the 70,000 yuan per tonne level might become accepted as the bottom of the market. “Although we are not optimistic about a rebound in lithium prices over the next year, we might be able to believe that there won’t be a significant further decline in lithium prices,” he said. “We have entered the bottom range.”
UBS sees 11 per cent to 23 per cent upside in lithium prices for the rest of this year, but cautioned the rally would probably be capped at $US10,968 a tonne because that level is when CATL may resume its lithium operation.
The early signs of a recovery in lithium stocks was welcome news to hedge fund L1 Capital, which disclosed this week that it had been buying falling MinRes stock. The firm now has a 5.35 per cent stake in the troubled miner.
RBC Capital Markets on Wednesday became the latest broker to slash its lithium forecasts, with analysts cutting its short-term spodumene projection by more than 30 per cent and carbonate prediction by over 20 per cent.
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