Diverging views on lithium industry

Supply-side pressures and the threat of a new technology solution support more bearish views on lithium, while bulls believe concerns are overdone.

The strong run in lithium miners has been long and sustained, up until 2018. Several lithium miners have lost ground since the beginning of this year amid concerns of greater supply, but some experts say these fears have been overdone.

Shares prices of companies that produce lithium – a metallic powder used to power lithium-ion batteries, including those in electric vehicle – have slumped this year. This contrasts with their double-digit gains in 2017.

Mineral Resources (ASX: MIN) share price has dropped around 22 per cent to $16.79. It owns the Wodgina mine in the Pilbara region, home to the world's largest known hard rock lithium resources.

Another WA lithium miner, Pilbara Minerals (ASX: PLS) is down around 26 per cent to 87 cents a share. This is despite a price lift early this month when it released a Pilgangoora mine forecast of 850,000 tonnes of lithium production.

Kidman Resources (ASX: KDR) has fallen around 30 per cent to $1.43, while Galaxy Resources (ASX: GXY) is also down about 30 per cent to $2.73. Orocobre (ASX: ORE) is down further still, having fallen 40 per cent to $4.61 since the beginning of 2018.

Supply concerns

“The weakness is coming from the supply side, the threat of an increase in supply from the South America and an increase in production in Australia,” says Morningstar head of equities research, Peter Warnes.

“In addition, the threat of new technology eventually coming up with a replacement for lithium may also keep a lid on its price. In the same way that Tesla said it will no longer use cobalt in its EV, and nickel instead, this could eventually be the case for lithium,” says Warnes.

“Over the next three to four years, given increased supply, the lithium price will be under more and more pressure because of these supply side pressures,” he predicts.

More than half of the global lithium supply is located in South America’s “lithium triangle”, an area of bright white salt flats that crosses Chile, Argentina and Bolivia.
On May 24, the world’s second-largest producer, SQM, announced an additional 80,000 metric ton capacity expansion. This drove down the share price of the Chilean miner, as well as those of US-based Albemarle, the world's largest lithium producer, and FMC, another major producer.

Morningstar updated its lithium carbonate price forecast on a Chilean export basis, to reflect SQM's new capacity expansion timeline. While its short-term price forecast increased to US$11,000, Morningstar lowered its medium-term forecast after 2021 to average US$10,500. Its 2025 long-term price forecast is unchanged at US$8.500 per metric ton in real terms.

Sell-off overdone

However, some experts say the sell-off in lithium stocks isn’t justified and higher prices for lithium are expected over the longer term, even if supply increases. Goldman Sachs, for example, recently called the lithium sell-off "overdone" and said investors should not worry about a potential flood of lithium supply, given strong demand for the commodity.

"Coupled with ongoing rising demand expectations as [car markers] look to electrify their fleets, we expect lithium markets to remain sufficiently tight to handsomely reward incumbent producers," Goldman Sachs said in a recent research note.

Analysts are also still rating some lithium stocks a "buy". According to consensus estimates published in The Wall Street Journal, of the nine analysts rating Galaxy Resources, six rate the stock a buy, and three a hold, with an average price target of $3.95. Orocobre attracts even more recommendations, with nine analysts rating it a buy, one overweight, one a hold and one a sell, with an average price target of $6.97.

For Kidman, of the five analysts surveyed, all rate the stock a buy, with an average price target of $2.70. For Mineral Resources, three analysts from six rate it a buy, while giving it a price target of $18.19. Pilbara Minerals has a buy recommendation from six analysts who rate it and a price target of $1.09.

Commodity price trending up

Prices of lithium carbonate, a key lithium ion battery raw material, have increased nearly 40 per cent in the past 12 months on the back of increasing electric car production, according to Benchmark Minerals Intelligence, a commodity price forecaster.

Benchmark Mineral Intelligence’s Lithium Carbonate South America price – a region which accounts for 68 per cent of global lithium carbonate production – has increased from $11,500 per tonne in June 2017 to a mid-point average of $15,750 per tonne in June 2018.

Lithium hydroxide, another lithium chemical that is consumed in lithium ion battery cathodes, has risen 10 per cent in the same time-period to $17,250/tonne.

"The lithium industry is facing a wall of electric vehicle demand," said Simon Moores, managing director, Benchmark Mineral Intelligence in a recent market update.

"Lithium prices have been high and sustained for many years now – something that those outside of the industry did not expect back in 2015. We have shifted from an industry being influenced by supply side problems to a demand driven story. Electric vehicles are now beginning to impact the lithium supply chain."

The writer owns shares in Kidman Resources.

More from Morningstar

• Top 10 articles of last week

• How to diversify your portfolio: listed Australian and global property

• Make better investment decisions with Morningstar Premium | Free 4-week trial

Nicki Bourlioufas is a contributor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.