Lithium price peak approaching, take care

Lithium is the star of the mining industry and likely to stay that way next year, but it would be unwise to ignore some of the early warning signs which are pointing to the approach of peak lithium, if it isn’t already here.

Whether the price of the leading battery metal can rise any further is a question to consider if only because of the immutable law of investment gravity – what goes up eventually comes down.

Most leading investment banks see lithium prices staying around their current elevated levels for at least the next 12 months but after that it could be a case of plunging over a price cliff.

Analysts predict declines

Goldman Sachs is using an average lithium hydroxide price of US$41,318 a tonne for this year in its calculations, before a modest slide next year to US$39,060/t, and then over the edge in 2024 to US$13,125/t.

Citi is a bit more optimistic, pencilling into its spreadsheets a price for lithium hydroxide of US$58,465/t this year, US$40,438/t next year and then down to US$25,000/t in 2024.

Macquarie is using a price deck of US$57,6008/t for lithium hydroxide this year and US$57,000/t next year, with a decline not starting until 2026 after which the price falls away to US$22,000/t in 2028.

Six important observations need to be made about those forecasts:

• They all indicate that profits from lithium will be exceptionally strong for at least the next 12-to-24 months, which will ensure investor support for most companies in the sector.
• The prices are bank forecasts (best guesses?) and as Danish physicist Nils Bohr famously said: “Prediction is very difficult, especially if it’s about the future”.
• The prices are only for lithium hydroxide, one of several forms in which the metal is traded. It can also be sold as semi-processed ore (spodumene), or lithium carbonate.
• Most lithium is sold privately with the world’s leading metals market, the London Metal Exchange, in the process of creating an open and transparent platform, which will trade in lithium hydroxide.
• Lithium exploration stocks are not directly affected by the price of the metal if they have a good discovery story to tell because profit margins will remain handsome even after a 50% fall in the price of the metal.
• The stocks at risk are those producers which are riding high on what are currently inflated price which will fade as supply rises to meet demand.

Miners enjoy prevailing high prices

Locally, the big price news in lithium is the spectacular returns being enjoyed by Pilbara Minerals (ASX: PLS) from online deals negotiated on the Battery Material Exchange with a sale earlier this week at a price equivalent to US7830/t for 6% spodumene.

That price is roughly 10-times what it costs Pilbara to produce spodumene, which explains why the relatively new company has seen its earnings and share price explode over the past two years.

From a low of $0.13 at the start of the Covid pandemic in early 2020 Pilbara has risen by more than 3,000% to $5.07 – down slightly on an all-time high reached last week of $5.61.

Pilbara’s rush from small cap status little more than two years ago into the ranks of the top 50 on the ASX with a market value of $15 billion is a factor in a corporate deal reported to be emerging in another lithium producer, Mineral Resources (ASX: MIN).

The plan being hatched inside Mineral Resources is believed to be the spin-off of its lithium assets to catch the current high multiples being applied to pure play lithium companies.

It is probably a source of annoyance to management at Mineral Resources that their business, which includes iron ore mining and engineering services as well as lithium has a lower market value of $13 billion than Pilbara Minerals, which is a pure play stock.

But the potential Mineral Resources lithium spin-off sits at a worrying point on the Lion Selection “investment clock”, which tracks the movement in the mining sector with six on the clock being boom conditions and 12 the start of a crash.

Lithium peaking

Big new floats, which is what the Mineral Resources lithium spin can be called, sits at 11 on the Lion clock, meaning it’s a late cycle event in the turn of the clock.

An earlier pointer to lithium peaking was a comment in late May from Goldman Sachs that “the lithium bull market was over for now”, and while that was obviously wrong at the time because the lithium price kept rising, a second big name bank last week warned clients to be cautious with lithium.

Morgan Stanley said it was raising a “yellow flag” over the lithium price after a surprise fall in the price received SQM, Chile’s biggest producer of the metal, received on a shipment to China.

The price fall, for a cargo of lithium carbonate to US$55,000/t from US$70,000/t a month earlier might have been the result of low-quality material, which is why the bank only raises a yellow (warning) flag rather than a red flag to signify a serious turn in the market.

The problem for investors is knowing what to believe when it comes to lithium, with the positive side of the metal comfortably outweighing the negatives, just as they seemed to be in 2018 before a flood of supply drowned demand and killed the price.

This time around the market for lithium is much bigger thanks to the electric vehicle rush and supply is struggling to keep up.

But if there’s one certainty about lithium it is the abundance of the element in the earth’s crust, especially in outback Australia, with Canada, the US, and other reliable mining jurisdictions just joining the lithium rush.

For now, lithium is the top sector for investors in mining stocks, but it’s unlikely to be this good for ever and there are warning signs for anyone prepared to look.