The brokers bearish outlook on lithium price is hurting the...

The brokers bearish outlook on lithium price is hurting the lithium market still..

Major broker warns lithium prices could fall another 33% in “bear case” scenario.

Lithium bulls are enjoying a rare but welcome two-day rally in ASX lithium stocks. There’s little news flow to justify the move, however, with lithium minerals prices still very subdued and hovering around 30-month lows. A preceding rise in US lithium stocks likely sparked the local rally, potentially due to investors making bets a restocking phase among Chinese battery and battery component manufacturers will commence following Chinese Lunar New Year celebrations which are due to kick off later this week.

Lithium carbonate prices are hovering near 30-month lowsIt's a crucial time for many local lithium developers and producers as spot prices for a range of lithium minerals have fallen to, or in some cases below, their costs of production. According to a major broker’s commodity research team, there could be more pain to come. Morgan Stanley has released an update on where it thinks lithium prices are headed, and what this means for several key ASX lithium stocks in its coverage.

Beware the bear case!Morgan Stanley’s base case for lithium carbonate is US$13,500/t, but the spot price has just slipped below US$12,000/t. The broker blames ongoing weakness in the price of lithium carbonate on what they describe as “elevated inventories across the chain”. Inventories are rising as production ramps up at several projects that commenced within the last 12 months, as well as continued strong supply from Chinese lepidolite producers.

Making things worse, on the demand side, the market for lithium minerals has been undermined by resolute destocking by Chinese cathode makers as the domestic EV market has seen a slowing of sales growth, and pricing has tightened considerably. According to Morgan Stanley, Chinese cathode production has tumbled 28% since August 2023.Monthly battery cathode production by type in China.

Source: SMM, Baiinfo, Morgan Stanley ResearchTogether, these factors have led Morgan Stanley’s commodity team to “see Li downside to somewhere between our base and bear case”. I should mention here the broker’s bear case price target for lithium carbonate is US$8,000/t. Whilst a target range of US$8,000/t to US$13,500/t is a broad canvas, it does imply Morgan Stanley sees that a further 33% decline in lithium carbonate prices is possible.Many lithium bulls have pegged their hopes on a fresh restocking phase following the Chinese Lunar New Year holiday, which begins this week, with public holidays all next week, and business not really getting back into full swing until Monday 26 February. It could be a long wait, suggests Morgan Stanley, who warns post-New Year restocking could “potentially disappoint”, and that this increases the risk of prices falling further.