Lithium In 2023: The Debate Rages On

This story features PILBARA MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: PLS

The future of lithium remains a hotly debated topic, as slowing demand from China in the December quarter raises concerns around the potential emergence of a market surplus, which could impact on pricing over the latter half of the year. 

-Lithium prices declined in the latter half of the December quarter, after a year of strong price growth
-Could 2023 actually end with a market surplus?
-ASX-listed share prices recovered in January as the global outlook debate continues

By Danielle Austin 

While 2022 saw the price of lithium rising steadily up until a possible peak in the fourth quarter, calendar year 2023 has started off with many questions being asked about the longevity of positive market dynamics. Some analysts are even toying with the idea of a potential market surplus later in the year.

The potential emergence of a supply surplus is key to the outlook (as it is for virtually every commodity). Should such surplus show up, prices are expected to fall sharply.

Electric vehicle sales and battery capacity installations remain at an all-time high, but the dip in the price of lithium in December has already been attributed to slowing demand from China.

In Australia, share prices felt the impact from the overall change in market mood. Among ASX-listed lithium exposures, Pilbara Minerals’ ((PLS)) share price took the greatest tumble late last year with its share price falling -18%. Argosy Minerals ((AGY)) bucked the trend, finishing the fourth quarter up 18% as it achieved first battery quality lithium carbonate production. 

Potential pathways for 2023

The December quarter saw lithium pricing peaking midway through and continuing to slide south as the calendar year transitioned into 2023. 

Canaccord Genuity had previously predicted pricing would peak during the December quarter and decline into the new year. Recent developments are still considered as in line with those projections.

The broker largely expects prices in the first half of 2023 continuing to reflect near-term tightness in the market and lagging contract price pass-throughs, before declining over the second half. 

In reviewing the potential pathways for the lithium market in the year ahead, Morgan Stanley highlighted that market views on lithium are more varied than for other minerals and metals. In an alternative view to that presented by Canaccord Genuity, it notes there is some investor concern supply growth will disappoint, leaving the market tight through 2023. 

There are also concerns the four major producers, SQM, Albemarle, Ganfeng and Tianqi, could operate as an oligopoly given they already held 47% of the market in 2022. This dynamic could see the majors cut supply if prices fall too far.

While noting this is a possibility, Morgan Stanley suggests such scenario remains unlikely as the lithium market is not devoid of new entrants. 

Read throughs for domestic investors

Share prices for ASX-listed lithium companies have recovered strongly in January. The general view is that share prices follow the direction in the price of lithium, though Canaccord Genuity anticipates price lags will support domestic stocks over the next 12-18 months.

Goldman Sachs has noted a preference for low cost lithium producers over developers, expecting producers with strong net positions will look to diversify their asset base as prices decline. 

With this in mind, Goldman Sachs retains a preference for Allkem ((AKE)), which it finds to offer one of the best production outlooks within its industry coverage.

Allkem also retains the largest lithium metal contained resource base and Canaccord Genuity sees upside risk in future opportunities at key assets. Goldman Sachs is Neutral on Pilbara Minerals, IGO ((IGO)) and Liontown Resources ((LTR)), while Core Lithium ((CXO)) is its least preferred stock. 

Macquarie, meanwhile, remains largely constructive on the outlook for lithium and lithium-exposed equities given favourable supply and demand trends. Similar to Canaccord Genuity, Macquarie sees producers benefiting from strong cash flows generated by current buoyant pricing.

Among domestic equities, Macquarie prefers Mineral Resources ((MIN)), IGO and Pilbara Minerals. It notes these companies are generating free cash flow yields of 23%, 5% and 11%, respectively.

Macquarie also sees value in Allkem and Liontown Resources, and considers Global Lithium Resources ((GL1)) to carry the greatest near-term exploration upside.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms