EV Oversupply Suggests Lithium Price Decline 

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The lithium market has remained tight, but analysts are bracing for conditions to ease over the second half of 2023 as Chinese EV supply outpaces demand.

-Analyst valuations prepare for increasing tightness in the lithium market in the year ahead
-A price decline is anticipated underpinned by an imbalance in supply and demand in the Chinese EV market
-Sizeable lithium resource supports Allkem remaining a preferred exposure for a number of brokers 

By Danielle Austin 

After strong market growth for the lithium industry over the last two years, analysts are assuming lithium pricing will decline in the coming year as supply and demand trends shift. 

While the market has been bracing for a reversion in market tightness, recent rising auction prices suggest a severe shortage of spodumene and miners continue to successfully sell off low-grade product, suggesting the market remains tight for now. 

This tight demand-supply model has underpinned growth in recent years, but is not expected to continue forever. Goldman Sachs predicts a supply deficit continuing into the new year, but anticipates a small surplus emerging over 2023.

As a result of this outlook, the broker assumes a price decline over the second half of the year. Goldman now assumes an average price of US$53,300 per tonne of lithium carbonate equivalent in 2023, ahead of a sharp decline that will see average prices of US$11,000 per tonne in 2024. 

Demand over the last year has benefited from policy stimulus in China that aimed to boost uptake of electric vehicles. Previously expected in 2023-2024, the stimulus saw demand pulled forward and was key to the sharp rise in demand experienced this year. 

Early signs suggest demand for the Chinese EV market is beginning to underperform production. Goldman Sachs believes this will come to weigh on lithium pricing in the coming year, likely emerging in the second half. 

With lithium pricing looking to reduce, the broker has noted a preference for producers over developers, and within its lithium exposure a preference for Allkem ((AKE)) (Buy, target price $15.20). The company holds the largest lithium resource within the broker’s coverage, and the stock trades at a discount to peers at just 1.02 times net asset value compared to a peer average of 1.30 times net asset value. Further, the broker finds Allkem to have the best production outlook, which it anticipates will underpin a return to record earnings despite an impending price decline. 

The company is employing an optimisation strategy, looking to reduce costs, improve product quality and mix and minimise impacts of inflation. The strategy also includes advancing studies on a purification facility to improve output of battery grade product from its Olaroz asset.

Allkem remains a top pick for a number of brokers

Alongside Goldman Sachs, four of the broker’s within the FNArena broker database report on Allkem. Three of these brokers are Buy equivalent rated, with only Morgan Stanley Underweight rated, and have an average target price of $17.90 with a range from $12.40 to $22.50. 

Having most recently updated, Morgan Stanley’s (target price $12.40) rating is predicated on demand headwinds, as well as spot commodity pricing. However, with the exception of Mineral Resources ((MIN)) the broker is underweight across the industry. 

The remaining three brokers, however, largely agree that demand will remain strong near-term. While acknowledging the near-term headwind presented by economic slowdowns, Macquarie (Outperform, target price $21.00) retains a constructive outlook on the lithium market. When last updating on Allkem in early November, the broker highlighted the company’s earnings looked to benefit from near-term upgrades to spodumene and lithium carbonate prices, driving earnings forecast increase of 26%, 50%, 40%, 62% and 110% through to FY27. 

Also updating in early November, Ord Minnett (Buy, target price $22.50) noted lithium prices had exceeded its expectations to date and underpinned upgrades on pricing expectations from the broker, while Morgans (Add, target price $15.70) echoed similar sentiments to explain its own forecast increases. Ord Minnett reiterated Allkem as its industry pick.

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