Lithium bulls fight the bears

Optimists are tiptoeing back into the downtrodden lithium sector, perhaps egged on by the latest enthusiastic assessment of the outlook for the battery metal from Macquarie Bank, and despite the risk of being caught in a bull trap.

Bears, as reported last week, have been mainly in charge of the market since late last year, with a few exceptions such as Liontown Resources (ASX: LTR) which received a high-priced takeover bid, and Patriot Battery Metals (ASX: PMT) which is enjoying exploration success in Canada.

But the overall lithium trend since Christmas has been down as investors digest a steady stream of negative international news, including sluggish electric vehicle sales in China, a sharp economic downturn in Europe, and a lack of interest (so far) in EVs in the US.

These factors will improve because governments are determined to displace internal combustion vehicles with EVs but how long the changeover might take is a risk for investors as is the fundamental question of a falling lithium price if supply gets too far ahead of demand which is what started to happen late last year.

Macquarie Bank remains bullish

Macquarie left its clients in no doubt as to where it reckons lithium is headed with a research note circulated just before Easter which listed every lithium stock it follows as outperform (buy), a rare case of a bank effectively saying: “buy the sector”.

What appears to be behind Macquarie’s unbridled enthusiasm is the potential for lithium miners to win higher prices than the published Chinese lithium carbonate value thanks to “different price mechanisms with offtake partners”.

If that view is correct, then some lithium stocks could deliver strong returns for investors prepared to ignore negative opinions.

Examples of Macquarie’s optimism include a tip that Pilbara Minerals (ASX: PLS) could more than double from last sales at $3.69 to a target price of $7.70.

Piedmont (ASX: PLL) could do even better with a 130% rise from $0.78 to $1.80, while Leo Lithium (ASX: LLL) stars with a forecast rise of more than 200% from $0.49 to $1.50.

Other banks predict falls

All of Macquarie’s share price forecasts should be seen alongside last week’s Small Caps story which highlighted the fall in the price of lithium carbonate from US$87,000 a tonne in November to US$35,000/t earlier this month.

It was that fall which underpinned warnings from two other banks, Goldman Sachs and Citi, that there could be even lower prices to come.

That negative theme from two of the world’s leading banks was reiterated this week in a report on EV demand in the US and the latest research note from a third major bank, Morgan Stanley.

Sluggish EV adoption

London’s Financial Times newspaper took up the theme of sluggish US demand for EVs in a report based on research by the University of Chicago’s Energy Policy Institute, which found that only 20% of Americans were very likely to buy an EV as their next car with the high cost and charger availability the primary reasons for the low ranking.

Even the promise of tax cuts promised under the Inflation Reduction Act was not enough to overcome the negative sentiment towards EVs in one of the world’s biggest vehicle markets.

It’s a similar story in China were an EV “buyers’ strike” and overstocking of lithium at factories which convert lithium into a product suitable for use in batteries has led to a collapse in the Chinese lithium price.

Morgan Stanley sees price floor emerging

Morgan Stanley can see a floor price emerging for lithium which will aid Australian miners of the material, but not just yet.

“Lithium prices continued their aggressive decline on weak demand, continued destocking and very low spot (short-term) volumes,” Morgan Stanley said in its pre-Easter research note.

“This raises the question of whether there is anything like a price floor?”

The answer to that question from the bank is that a floor price could emerge from the financial distress among Chinese lithium converters, especially non-integrated converters which have to buy their lithium rather than have their own source of supply.

“Non-integrated converters are bleeding cash,” Morgan Stanley said.

“The current situation appears unsustainable.”

“There are two ways the market can adjust. The spodumene (part processed ore) price has to decline further or carbonate focussed converters need to reduce production.”

Morgan Stanley, in a clear warning for lithium bulls, reckons that the spodumene price has to fall by almost 40% to US$3,000/t for converters to break even at the current carbonate price.

If correct, that potential 40% fall would be on top of the earlier 40% fall recorded since Christmas.

Timing is everything

Timing is everything in this scenario. Some investors buying Australian lithium companies are probably looking through the tough times in China and the slow-moving EV markets of Europe and the US.

In time, the buyers today should be winners tomorrow, it’s just that no-one is quite sure when tomorrow might arrive – a classic bull trap.

What investors have to consider is that before getting to the recovery it is likely that spodumene prices will fall further, possibly down from last reported sales at US$4,850/t last week to the US$3,000/t tipped by Morgan Stanley.

Lithium carbonate could be on its way down to US$25,000/t in the September quarter, according to Morgan Stanley, which is 20% lower on last reported trades at US$31,000/t and down a spectacular 71% on the record price of US$87,000/t reached just five months ago.