While the lithium sector continues to exhibit significant volatility, the structural outlook for lithium remains positive.
Critically, the structural outlook for lithium remains intact, which should support attractive long-term lithium prices and, by extension, significant cash generation from lithium producers.
Therefore, current weakness in the lithium sector should be seen as an attractive buying opportunity for investors.
Lithium prices have come under pressure in recent months on the back of headwinds that are cyclical (not structural) in nature, which has weighed on share prices of the ASX listed miners, including our positions in Mineral Resources (MIN) and Allkem (AKE). The lithium carbonate spot price hit an all-time high of about $80 per kilogram of LCE (lithium carbonate equivalent) in November 2022, before falling back to its current price of ~$25 per kilogram of LCE.
The fall in price has primarily been driven by cyclical concerns around the pace of China’s electric vehicle (EV) uptake and the potential for oversupply as new projects come online.
However, the structural drivers are still intact, and the current sell-off appears overdone. Demand growth over the next decade should remain strong and supply will underwhelm consensus, in our view.
The underwhelming recovery of the world’s second largest economy and largest EV market has weighed on sentiment towards the lithium sector.
China has experienced cyclical softness in demand for EVs this year, driven by a subdued consumer backdrop, which has been exacerbated by inventory destocking by battery cell manufacturers, which we believe is nearly over.
Despite the immediate challenges in China, the long-term structural demand story for EVs remains strong.
China’s recent renewal of a tax break extension for EV purchases to 2025 should help to steady sector growth over the medium-term, while the headline data looks increasingly positive with China recording a record month of EV sales in August, with sales increasing +35% YoY, signaling the worst is over for the sector.
The prospect of further fiscal support aimed at stimulating Chinese household demand also presents a potential catalyst for the EV sector and the lithium price over the coming months.
Oversupply is a concern for the market. The most common bear case towards the lithium sector is that the market will be flooded with new supply as prospectors/explorers/miners ramp up their investments, incentivised by elevated spot prices.
However, given... the significance of demand over the next decade, stemming from the rapid transition to EVs, it is difficult to see a scenario where overall supply can keep up with the scale of expected demand this decade, with industry heavyweight Albemarle estimating that ~100 new projects will be needed by 2030 to support demand.
While a significant amount of new supply is forecast this decade, significant risks loom over consensus supply expectations. This is due to the growing prevalence of cost overruns and delays across lithium projects. Increases to growth/sustaining CAPEX combined with longer build timelines across the sector could put upward pressure on the lithium cost curve, which is likely to support higher commodity prices, all else equal.
Supply issues for lithium projects are likely to remain as:
Supply Delays Common: Mining projects commonly experience delays ranging from 7 months to 2.5 years, with little room in supply forecasts for such setbacks. A Mckinsey study suggests that just around 20% of mining and metal projects are completed within their designated timelines and budgets.
Labour Shortages: Persistent shortages in skilled labor continue to impact the industry.
Industry Immaturity: The lithium sector, unlike traditional resources like iron ore and copper, lacks the established knowledge and intellectual property needed for rapid supply expansion, intensifying the challenges.
US Inflation Reduction Act (IRA): ~60% of new supply is expected from countries without a US FTA (free trade agreement), and will be challenged to qualify as ‘IRA compliant’. Therefore, the increase in US demand will not be met with eligible supply. The US is expected to be the third largest market for lithium hydroxide by 2030.
Looking past the cyclical volatility, the structural trend for lithium remains steadfast. Electric vehicle (EV) demand is poised to continue growing strongly in the latter half of this decade, in line with the targets and legislation announced by governments globally.
Global EV penetration is projected to reach 50% by 2030, with the number of EVs on the road expected to surge by 3.4 times current levels by the same year.
By the decade's end, the lithium market is anticipated to face a substantial deficit as demand outpaces supply. We do not think supply delays are adequately reflected in consensus expectations, which could exacerbate the forecast shortfall.
The prospect of worsening supply deficits presents upside risk to the lithium price, in our view. Should the market anticipate this deficit, prices are likely to rally as battery manufacturers rush to secure lithium reserves before the deficit materialises. Therefore, there is a risk the long-term consensus price rises over the medium term.
We want to hold lithium miners that have 3 key characteristics:
Allkem (AKE) - 2% Focus Portfolio Weight
Mineral Resources (MIN) – 3% Focus Portfolio Weight
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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