BofA turns bearish on lithium

New lithium supplies coming to market from at least six new projects in the next six months will exacerbate the price pressures the battery-making ingredient has been grappling with the past five months, new analysis by Bank of America concludes.

The bank has adjusted its 2023 price forecast for lithium, lowering spodumene 8.4% to US$5,038 per tonne, carbonate 27.2% lower to US$48,809 per tonne and hydroxide 19.6% to US$55,076 per tonne. For 2024, the bank has lopped 15.6% off its prior forecast to US$3,375 per tonne, carbonate 44% lower at US$32,500 per tonne and hydroxide was lowered 42.9% to $34,000 per tonne.

According to the bank’s Apr. 5 Global Research report, weaker Chinese trading data suggests price pressure might ripple outward and affect global markets, which had largely resisted the market weakness until now.

The bank’s research shows that carbonate prices have outpaced hydroxide price declines in China. Even spodumene prices have folded in half to US$40,000 tonne, wiping out margins for spodumene converters (at US$5,000 per tonne) selling carbonate.

The bank suggests some margin on the conversion of carbonate to hydroxide remains, though should current trends sustain, it expects the price weakness to bleed through as well.

BofA says lithium chemical suppliers must exercise discipline and pull back on shipments. Albemarle (NYSE: ALB) and Pilbara Minerals (ASX: PLS) could exert considerable influence given their scale in spodumene.

However, where supply restraint was a solution in the past, it’s not a silver bullet in the future. BofA says it is skeptical these producers will try to prop up markets since froth in the lithium price is generally not good for the industry’s health.

“Withholding volume as new entrants commission could prove futile,” wrote analyst Matthew DeYoe. “Should this stage-gate on supply fail, we will likely see more downside to price as new volumes jockey for share.”

This scenario is likely, assuming demand stays muted, which the analyst notes is not a consensus view. Coupled with the new supplies, would make sustaining a price rally difficult.

“Corporates have supported the notion that demand accelerates seasonally come the second quarter, driving a restock through China. This could very well happen, though we note the quarter will also mark the start of commissioning of six new mines,” according to the bank.

BofA says hydroxide and lithium markets outside China have held up relatively well, with non-China Asia carbonate prices at about US$63,500 per tonne.

“We take this as a sign that the buyer-strike continues to be a China-centric phenomenon, and the prevalence of contracted transactions in markets outside China has helped prop up the price,” DeYoe said.

The bank’s research team expects a potential brief price rally during the third quarter but sees strong potential for the negative price trend to revert by December.

BofA suggests there is no shortage in lithium deposits, so producers are free to increase supplies – one reason DeYoe is bearish on the 2023-24 pride forecasts. However, access to funding is usually the determining factor to supply.

DeYoe says lithium has gone through two cycles in the past six years. Producers boosted investment as prices rose, but as that supply hit the market, quotations dropped, reining in output, and the cycle started anew.

However, it’s not all doom and gloom. U.S. and E.U. industrial policies and onshoring of lithium production to those areas should lift the floor under lithium prices. The bank says that exponential demand growth at the same time as supply chains are rejigged also makes periodic shortfalls more likely, suggesting that volatility will remain high.