Morgan Stanley claims lithium price will plunge 45% by 2021, Pilbara Minerals not fazed

Morgan Stanley lithium report Pilbara Minerals

One of the world’s most eminent investment banks, Morgan Stanley, has thrown a potential spanner in the works of the burgeoning lithium industry.

In a research report published this week, the bank predicts the current growth of electric car sales to undershoot current expectations, thereby stoking fears that previous lithium supply shortages will become a redundancy and possibly leaving stockpiles of the metal unsold.

One of the major takeaways from the report, is that Morgan Stanley stipulates a required rate of 31% of all new cars sold being of the electric variety, for the current rate of lithium supply to balance with demand.

The bank says the current rate of new electric cars sold is only around 2% and would have to rise significantly to at least 31% by the year 2025 to “clear the market.”

Morgan Stanley’s research directly contradicts consensus analyst estimates of a lithium supply shortage, but despite its minority-held view, markets reacted negatively to the controversial research report.

Albemarle shares closed down more than 7%, while its biggest rival SQM fell by more than 8% over the past two days. Morgan Stanley analysts also downgraded their ratings to “underweight” from “equal weight.”

Over in China, BYD shares, a major Chinese battery and electric car maker fell 3% but continue to trade more than double their price in 2015.

Morgan Stanley’s report goes on to forecast spot lithium prices to fall by around 45% by 2021 on the back of around 500,000 tonnes per annum (tpa) being added to global supply by 2025.

Morgan Stanley forecasts the price of lithium carbonate will fall from US$13,375 per tonne to $7,332 per tonne by 2021, and then towards its marginal cost of production at $7,030 per tonne thereafter.

Hundreds of junior explorers have gone out in the field over the past two years, in search of high-grade lithium endowments at either brine lakes or hard-rock lithium mines.

Morgan Stanley expects the forthcoming additions to global supply to “swamp forecast demand growth,” and has therefore warned clients of lithium market overexuberance.

Scooping the lithium market

Lithium prices have more than doubled over the past two years fuelled by rampant demand for devices and products that use lithium-ion batteries.

Mobile phones, laptops, tablets and electric cars have emerged as the front-running products to which the lithium-ion battery industry is most connected to.

A variety of companies from different sectors have begun to secure ample lithium supplies in order to facilitate ambitious production schedules that are expected to put over ten million new electric cars on the road just in the US alone, within the next 5 years.

Carmakers such as Tesla in the US and BYD in China, who estimate even steeper electric-car adoption rates, are responding to consumer demand for more efficient and reliable vehicles, but this has put pressure on existing supplies which many analysts predicted would be insufficient on a global scale.

But according to Morgan Stanley, Chile as a standalone country “threatens” to add at least 500,000 tonnes of lithium production in the coming years, thereby deflating any lithium inflation fears. The bank also says that “it would take much higher EV penetration rates to offset these surpluses.”

According to the Financial Times, Tesla is in talks with Chile’s SQM oversupply of lithium hydroxide, while other companies such as BMW and Volkswagen have also been rumoured to be in direct discussions with lithium miners.

Apple, the maker of the iconic iPhone, was recently reported to be in talks with cobalt suppliers for the same reasons i.e. securing reliable supplies of critical raw materials required for its wide range of battery-powered products.

Pilbara Minerals offers respite

Despite Morgan Stanley’s downbeat report, it’s not all doom and gloom in lithium mining this week.

Pilbara Minerals (ASX: PLS), a mature Australian lithium developer currently worth around A$1.55 billion, just secured an $80 million lithium concentrate offtake deal with South Korea’s POSCO.

Its shares rose by over 10% on the news with analysts noting an Asian lithium arms race of sorts developing between South Korea and China.

Pilbara Minerals will start off with an initial supply of 80,000 tonnes of spodumene, before upscaling up to 240,000 tonnes per year if the two entities go ahead with a proposed joint-venture deal.

POSCO has agreed to invest almost $80 million into a plant which will potentially see Pilbara Minerals form a 30% joint-venture with its South Korean counterpart.

In response to questions regarding the deal, Pilbara Minerals managing director Ken Brinsden said the “pace of expansion of the lithium-ion battery sector in Asia was probably not fully appreciated by Western analysts.”

Pilbara Minerals is currently Australia’s most progressed lithium explorer with large-scale production expected to commence this year.

The company plans to kick-off production at a rate of 300,000 tonnes of lithium concentrate in H2 2018, eventually reaching as much as 800,000 tonnes per year as forecast in earlier feasibility studies.

As uncertainty continues to pervade analyst estimates, Morgan Stanley’s report has at least reminded market analysts and investors alike, the astronomical growth of lithium and cobalt prices since 2016 may well be overdone.

Capping the lid on lithium and cobalt

From one perspective, lithium and cobalt supplies are insufficient to keep up with the millions of devices and electric cars being sold — but from another perspective — the sudden rush of prospective explorers has created a pent-up pipeline of overwhelming lithium and cobalt supplies that will satiate world markets adequately (if and when the huge demand for lithium-ion batteries does materialise).

The Oracle of Omaha, otherwise known as Warren Buffett, has a trading idiom for this very situation; and he would be a good person to ask given his $230 million investment in BYD, a Chinese carmaker, back in 2009.

Back then, BYD was just on the verge of commencing electric vehicle sales, but now, BYD is China’s largest seller of electric vehicles.

The company has seen its stock price rise over from $2 per share in 2008, to around $10 per share today. The appreciation has meant Mr Buffett’s stake has grown to around $1.9 billion.

“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes,” according to the Oracle.

With electronics manufacturers scampering to secure viable supplies of lithium and cobalt, maybe they have less to worry about than they first feared. Or maybe, they are best advised to secure viable supplies before their competitors do.

In hindsight it will be clear how much lithium and cobalt was required for 2018 and beyond, but with today’s outlook, it is uncertainty that is most abundant in amidst the ongoing battery-powered energy storage revolution.

George is an award-winning market analyst who has authored articles and editorial opinion pieces for multiple publications around the world. He has written about a wide variety of topics including financial markets, stocks, trading, politics and economics.