The lithium market is currently under pressure, with many pointing to a recent report from Morgan Stanley (MS) as the culprit. MS contends that the rapid rise in lithium’s price will soon bring significant new supplies online. The bank believes the coming supply glut will slash lithium prices by 45% from current levels by 2021. There is truth in their position as new supply from Chile is set to hit the market soon.
While lithium shares have suffered in the wake of this report, lithium prices have yet to significantly correct.
Lithium Market Stumbles Under Supply Forecast
Lithium-related stocks are declining amidst these warnings. Weakness in equities is occurring despite lithium’s price hanging in there. The charts above highlight the incredible rise of lithium prices over the past five years.
In Lithium prices to fall 45% by 2021, Morgan Stanley says, the bank paints a bleak outlook for lithium prices.
“Morgan Stanley forecasts the price of lithium carbonate will fall from $13,375 a tonne to $7,332 a tonne by 2021, and then towards its marginal cost of production at $7,030 a tonne thereafter.”
Furthermore,
MS downgraded its ratings on two of the largest producers of lithium, Albemarle and SQM, to “underweight” from “equal weight.” Despite recent weakness in lithium prices, there are a host of reasons why MS’s position on lithium could be flawed.
Supply Is not Everything for Lithium Market
MS makes the assumption that there is not a huge amount of pent-up demand waiting in the lithium market.
Existing demand for lithium used in Electric Vehicles and Smartphones are expected to increase. Add novel technologies such as battery arrays for green electrical generation, and lithium-air batteries, and it is easy to see where loads of new lithium demand could come from.
Major potential users of lithium include VW, BMW, Tesla and Apple. These iconic brands have yet to lock down long-term supplies of lithium, which leaves spot prices in a volatile position. On Tuesday it was announced Tesla’s Model 3 became the best selling electric car in the U.S., after shipping 8,180 cars. Assuming that MS’s recent note is not on the money, the recent downdraft in lithium shares is a buying opportunity.
The narrative towards lithium stocks and the market is changing. After years of wondering how supply will meet demand, investors are now fretting about an impending supply glut. There are plenty of lithium juniors that have gone on sale over the last few weeks. Finally, if the supply demand dynamic changes, sentiment will bounce back, sending many of these companies higher.
