Lithium: How to ride what’s left of the rising tide

About the author:

Author name:

By Chris Brown

Job title:

Senior Analyst

Date posted:

20 January 2022, 9:00 AM

Sectors Covered:

Junior (Emerging) Resources

• Spot lithium prices have hit new records and are putting pressure on contract prices.
• Tight supply is expected throughout 2022 with futures in contango.
• Our key pick Allkem (ASX:AKE), which we upgrade to an ADD (login to view), is expecting strong price increases in 2H22.

Spot prices are surging past contract prices

In the first week of January the spot lithium price carbonate price in China, reached a record high of USD41,925/t as noted by Benchmark Minerals, while LME’s lithium hydroxide benchmark is up 177% from its low in May 2021.

A gap is growing between contract prices and spot however. Pilbara Minerals’ third spot auction in 1Q22 traded at USD2,350/t (5.5% LCE) compared to its expected average price of USD1,650 – 1,800/t (6% LCE) during 2Q.

We expect contract prices to rise but likely by not as much as spot prices. Some producers negotiate price updates and given the smaller volumes in the spot market we expect buyers will push to limit increases.

Shortness of supply looking to last even with extra tonnes expected

The industry is expecting the tight market to continue with CME lithium hydroxide futures in contango throughout CY22.

PLS has reduced its FY22 production guidance by 12% to between 400 – 450kt of spodumene concentrate from commissioning delays in WA.

AKE has a strong December quarter and a long growth runway

Our preferred stock for lithium exposure, Allkem (ASX:AKE). As detailed overleaf, we upgrade our forecasts, and upgrade to an Add recommendation with (login to view) price target.

AKE announced a 68% qoq increase in revenue at Olaroz and a 7% CY21 beat of production guidance at Mt Cattlin with large increases in realised prices at both projects.

AKE expects USD20k/t for lithium carbonate sales in 2HFY22 at Olaroz.

Production growth continues with Naraha commissioning, progress on Sal de Vida and FID expected on James Bay in 2QCY22. Construction is expected to commence the following quarter.

In the medium term - pressure will be on battery prices

Cell manufacturers and automotive OEMs are likely to be squeezed between the pressures of the raw materials markets and the need to continue to reduce the cost of EVs to drive mass market adoption.

In April 2021, Benchmark Minerals estimated that 65%-70% of battery costs come from raw materials. We think the tight market has the potential to slow the uptake of EVs in the medium term however there are no indications of slowing demand in the short term.

We expect ongoing volatility in the sector as the market seeks to understand how supply and demand will be balanced. We think that while this cycle has moved out of the early stages it still has some room to run in the short term.

Figure 1: CME Lithium Hydroxide forward curve (USD/kg as of 4PM AEST 19/1/2022)

Source: CME, Morgans Financial 

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