Lithium | H2'24 update - flatter for longer Our colleagues in...

Lithium | H2'24 update - flatter for longer

Our colleagues in Australia published a lithium market update (Lithium | 2H’24 Recharge – flatter for longer), outlining our revised supply demand assumptions in light of recent market developments, as well as a revised lithium price deck. In this note, we update our ratings and target prices for our North American and UK coverage. Market balance maintained for longer as surplus digested The lithium market remains in a tough position as continued supply additions (incentivised by price and supply fears) are paired with weaker demand growth. On the demand side, China EV sales growth remains robust (21% over 1H'24), offset by slower western market adoption which faces increasing headwinds (i.e., removal of purchase incentives, tariffs on Chinese exports). On supply, additions have come from around the globe (Figures 18-21) but, one region that remains opaque is African supply, in particular Zimbabwe, where several large scale mines have begun operations, quickly adding tonnes to the market. Following revisions to our SxD modelling, we now expect minor surpluses to 2028 (previously 2026) driving a more subdued pricing outlook. Rapid growth in supply from Zimbabwe comes at a cost We recently returned from the country where we visited projects and met with several companies. We see it as a source of supply growth, but it comes with a catch. Zimbabwe hosts three large scale operations (Bikita, Arcadia, Sabi Star), one operation under development (Kamativi), and one at pre-development/DSO stage (Sandawana). This led to a rapid increase in export tonnes and mainstream narrative of massive volumes of supply. However, we believe there are several factors that the market has missed and while supply is real, there are a number of caveats. These include ability to reach name plate capacity (engineering, mining, and plant build quality), lower concentrate grades (2023 average of 2.9%), higher costs (lower output, inflation, fuel, and logistics), and increased sovereign challenges (capital gains tax changes from 5% to 20%, changes export permits). So while we see the potential of Zimbabwean supply, and upgrade our long-term output, we also believe near-term capacity is somewhat overstated and this supply tends to be clustered at the top end of the cost curve. Price assessment follows market balance We have flat lined our price forecast until 2026. We see SC6 pricing being range bound between US$1,000-1,500/t until 2027 on adequate supply. Excursions below US$1,000/t will result in the supply removal and a quicker rebalancing of the market. We forecast average chemical pricing of US$15,129/t out to 2027. From 2027, we believe the supply additions will have abated (Figure 22) and demand growth from North America and Europe will drive pricing higher. We continue to place LT pricing at US$1,500/t (SC6) and US$22,500/t (chemicals); it remains our view that this is needed to stimulate supply longer term. Equity implications Our revised price deck has driven an average 14% decline in valuations across our coverage universe, either through earnings downgrades (producers price targets -19% on average) or through increased dilution and project delays (developers price targets -14% on average). See sidebar and Figure 29 for details.