Oversold Lithium Could be About to Rally

So far, there is no clear data or evidence that that the lithium demand narrative is about to slowdown, let alone reverse. On the contrary, certain emerging trends in the industry suggest just the opposite.

Posted on 01/29/19
By Alex Kimani | Via Oilprice.com
(Image by cintersimone, CC license)

It’s been a decade of lows for commodities after posting 7 declines in 11 years, but we’ve seriously underestimated lithium. It’s back with a vengeance in 2019.

 

The commodities market endured yet another annus horribilis, with just four commodities—natural gas, uranium, cocoa and wheat—recording any uptick at all. Last year’s 12 percent slide by the Bloomberg Commodity Index–spurred by 20 percent-plus declines by industrial bellwethers like West Texas Intermediate crude, steel and platinum—came in the wake of two years of modest gains.

 

Key lithium trends to watch in 2019 and beyond
– Lithium carbonate prices will steady in 2019 before picking up steam starting 2020
– Lithium hydroxide prices could soften a little bit after remaining resilient in 2018
– China will become less important as a global price trend driver as demand rapidly builds up in other key markets
Viewed against that kind of backdrop, lithium’s 50 percent correction that snapped a multi-year winning streak appears less vicious. It’s important to remember that prior to the crash, lithium had enjoyed a meteoric rise with prices doubling since the beginning of 2016 and nearly quadrupling over the past decade. The fact that much of the rally coincided with a sharp rise in the value of the U.S. dollar makes it all the more remarkable.

 

Investing in the commodity market can be a roller-coaster ride; what with the incessant boom-and-bust cycles driven by the ebb and flow in infrastructural spending, production ramps/cutbacks and stockpiling/destocking supplies. And just like other financial markets, trader sentiment plays a big role in determining trajectories.

 

Related: Political Crisis In Venezuela To Reshape OPEC

 

Unfortunately, it’s the latter scenario that took center-stage during last year’s lithium crash. A furor around anticipated new supply especially from China’s new hard-rock projects and Chilean brine mines got out whack and derailed the market.

(Click to enlarge)

Source: Metallary

(Click to enlarge)

Source: Trading Economics

 

Tsunami of Oversupply?

The situation was not helped by Wall Street punters sounding the alarm over the dangers of oversupply …

 

Shares of major lithium producers and explorers including Sociedad Quimica y Minera de Chile (NYSE:SQM), Albemarle Corp. (NYSE:ALB) and Orocobre Ltd (ASX:ORE) received a severe hammering in March after Morgan Stanley forecast that Chilean low cost brine producers could add as much as 200kt per year by 2025, while expansion of China’s and Australia’s hard-rock mines could pump in another half a million metric tonnes over the timeframe. That’s certainly a massive production ramp-up considering that global production in 2017 totaled just over 200kt.

 

In August, Macquarie Research provided the final straw after chiming in with a warning that the market was “sleepwalking into a tsunami of oversupply.”

 

The report put the final nail in the coffin of the decade-long lithium rally– Fastmarkets reckons that prices for battery-grade lithium carbonate in China, by far the world’s largest consumer of high-grade lithium carbonate, tumbled 50.31 percent last year to 75,000-83,000 ($10,885-12,046) yuan per tonne from 158,000-160,000 ($22,932-23,222) yuan per tonne the previous year, as demand waned.

(Click to enlarge)

Source: Metal Bulletin

 

But maybe the bear camp rushed their fences this time…

 

While it’s undeniable that the carnage managed to exceed even Morgan Stanley’s decidedly pessimistic outlook for global lithium prices to drop 45 percent by 2021, the fundamentals suggest that the selloff was greatly overdone and such low prices cannot be justified by simple market forces of supply and demand.

 

According to London-based Benchmark Minerals Intelligence senior analyst Andrew Miller, the disconnect between lithium prices and the demand side of the equation has never been bigger.

 

Reality Check

A cross-section of materials experts have raised eyebrows at the negative assessment, criticizing the investment analysts for underestimating the rise in lithium demand and the complex nature of lithium mining and production ramps. According to them, both MS and Macquarie failed to account for just how big the gap between supply forecast and actual production can be.

 

And, they might be spot on.

This article first appeared in OilPrice.com and is being reproduced under a special arrangement. Click here to go to the original.

 

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