Lithium prices have remained under pressure this year to date, driven by a combination of softer than expected battery-sector demand and an influx of new supply into the market.
These two factors have driven a near-term oversupply of the metal that is larger than previously anticipated.
On the demand side of the equation, growth in electric vehicle (EV) uptake has decelerated in the US and Europe, which is partly reflective of the mixed consumer environment. Meanwhile, in the all-important Chinese market, battery demand has been impacted by prolonged softness in the domestic economy. Moreover, the near-term outlook for lithium demand in China has been clouded by recent tariffs from the US and EU on Chinese EVs.
This softer demand backdrop has driven severe inventory de-stocking across the battery supply chain over the last year, creating a downward spiral in prices and demand.
At the same time, global lithium supply has grown meaningfully over the last year, driven primarily by higher cost resources including African spodumene and Chinese lepidolite operations. In terms of known near-term supply additions, capacity is being ramped up at the Kamativi mine in Zimbabwe, the Manono mine in the Congo and at SQM’s operations in Chile. We note there is a degree of uncertainty around the magnitude of further near-term China/Africa supply additions.
Despite weak near-term sentiment, structural deficits are expected this decade
Modest near-term surpluses are symptomatic of lithium’s relative immaturity as a major global commodity market, which has driven a temporary mismatch in the aggressive growth profile of both supply and demand.
While weak near-term sentiment appears likely to persist for the remainder of this calendar year, we are confident that further downside for lithium prices will be limited from here, given support provided by the cost curve. Our positive long-term structural view towards lithium remains unchanged.
Strong growth in lithium demand is still likely to result in compounding supply deficits this decade, which underpins our expectations of higher lithium prices over time.
The Focus Portfolio remains selectively positioned in Arcadium Lithium (LTM) and Mineral Resources (MIN), which are low-cost producers that are well placed to weather the current weakness in the lithium price.
The Best Cure for Low Prices Is… Low Prices
A meaningful proportion of producing and prospective lithium projects will be unprofitable at the current lithium price. This is likely to result in higher cost lithium producers mothballing their production and/or deferring expansion projects, which will eventually result in supply exiting the system.
There have already been examples of this domestically, with Core Lithium, for example, suspending mining at its Finnis operation earlier this year until market conditions improve. Over time, this dynamic should improve the supply/demand balance of the market, reducing forecast surpluses which we expect to support lithium prices.
Further downside is likely to be limited by the cost curve
While the timing of a recovery in the lithium price is inherently uncertain, assessing cost levels provides insight into where prices may receive some fundamental support.
The cost curve of existing projects suggests that further downside to lithium prices is likely to be limited, with the S&P Global 2024 global lithium cost curve implying that ~20% of assets aren’t profitable on a total cash cost basis (which arguably underrepresents the level of cost support as it excludes project and sustaining capex requirements).
Therefore, we are comfortable that we are at, or near, a ‘price floor’ for lithium, with further downside likely to be limited from here.
Structural Deficits Are Still on the Horizon
EV demand is still expected to rise strongly over the medium and long-term, which underpins industry forecasts of aggregate battery demand tripling by the end of the decade.
The current ‘softness’ in EV sales is partly attributable to the challenged economic backdrop (particularly in China), remembering that EVs (like traditional vehicles) are ‘big ticket items’ that are prone to temporary weakness in the consumer environment.
Despite the current headwinds, global passenger EV sales have continued to demonstrate strong structural growth, rising +26% YoY over the first five months of 2024.
Moreover, consensus expectations are still for strong growth in EV sales over the long-term, despite recent concerns around the potential impacts of tariffs on Chinese EVs and ‘net zero’ target setbacks in a number of countries. S&P Global forecasts a CAGR of >20% to 2028.
Over the next decade, demand for EVs will be supported by the car maker-led transition towards EVs which is driving a greater choice for consumers and improving EV affordability. Government incentives are also promoting EV uptake.
Therefore, in line with most industry forecasters, we continue to expect strong growth in demand for lithium (driven by EV demand) to result in compounding supply deficits over the long-term which will support higher lithium prices over time in our view.
Lithium Prices Need to Move Higher (for Future Demand to Be Fulfilled)
For future supply to fulfill future lithium demand requirements, the global incentive curve indicates that lithium prices will need to increase in order to incentivise producers to bring additional supply online.
The Wilsons Advisory Natural Resources team forecasts a long-term lithium carbonate price of US$20k/tonne. This is based on the 90th percentile of the team’s proprietary global incentive price curve, which uses an IRR (internal rate of return) assumption of 15%.
In simple terms, the incentive price represents the ‘required price’ for projects that are yet to be built to generate an IRR of 15%+ (after accounting for expected capex and operating costs). This is a highly conservative assumption that in our view likely underestimates the required rate of return for prospective lithium producers.
Therefore, while commodity cycles are inherently difficult to predict in the short-term and sentiment is currently weak, we are confident that lithium prices need to move higher over time if future demand is to be fulfilled.
At spot prices of US$13k/tonne for lithium carbonate, there is ~50% upside to the lithium price over the long term based on these assumptions.
Re-stocking will be the key catalyst for a lithium price recovery
Just as de-stocking has been the key driver of the downswing in lithium prices since 2023, the most significant near-term catalyst for a recovery in the lithium price will be the commencement of demand-driven re-stocking across the battery supply chain.
While the exact timing of when re-stocking will occur is unclear, with inventory levels now relatively low, we expect re-stocking to support a recovery in the lithium price sometime over the next 12-18 months, before emerging structural supply deficits manifest themselves over the medium/long-term.
As re-stocking emerges, we believe that a lithium price recovery could be equally as swift as the pace of decline in lithium prices experienced from early 2023 to now.
Remaining Selective Within Low-Cost Producers
The Focus Portfolio remains selectively positioned in Arcadium Lithium (LTM) (2% weight) and Mineral Resources (MIN) (2% weight), which are well placed to weather the temporary softness in the lithium price given:
1. Low-cost operations
LTM and MIN’s producing assets are low on the cost curve, which has allowed both companies to generate positive operating free cash flows to date despite depressed lithium prices.
2. Sound balance sheet positions
LTM’s balance sheet is very strong, with a positive net cash position of US$297 million as of December 2023. Gearing is expected to remain very low over the next few years.
While MIN’s current gearing is relatively high, this reflects its recent capex cycle (focused on Onslow Iron). With MIN now past ‘peak capex’, and cash flow from Onslow Iron set to build over FY25/26, we are comfortable that the company’s level of gearing will fall materially over the next 12-24 months, while its next major debt maturity is not due until 2027. MIN’s balance sheet will also be supported by the recent sale of 49% of its Onslow Haul Road for A$1.1 billion up-front (plus a deferred consideration of up to A$200 million).
| Company name | Ticker | Portfolio positioning | Valuation / fundamental metrics (12 mth fwd) | ||||||
| Weight % | Lithium exposure (% of FY25 EBITDA) | Look-through lithium exposure** | EV/EBITDA (NTM | EBITDA growth (FY24) | EBITDA CAGR (FY25/26) | NPAT margin (NTM) |
ROIC (NTM) | ||
| Mineral Resources | MIN | 2% | 41% | 0.8% | 9.1 | -23% | 47% | 9% | 12% |
| Arcadium Lithium | LTM* | 2% | 100% | 2.0% | 6.7 | -34% | 53% | 22% | 24% |
| Focus Portfolio | 4% | 2.8% | |||||||
| ASX 300^ | 1.2% | ||||||||
*LTM has a December financial year end, MIN has a June financial year end. **Look-through exposure is calculated by multiplying portfolio weight by the proportion of FY25 EBITDA directly derived from lithium extraction (excluding intersegment earnings and corporate overheads). ^ASX 300 index weighting is based on Wilsons Advisory’s assessment of lithium producers (rather than official GICS classifications). Source: Refinitiv, Wilsons Advisory.
Focus Portfolio Lithium Exposures
Arcadium Lithium (LTM)
- Large, low-cost, vertically integrated producer with both upstream and downstream (processing/conversion) assets. Benefits from diversification by geography and asset type (spodumene/brine assets).
- ‘Hedged’ lithium hydroxide exposure lessens earnings volatility, with ~25% of sales in CY24 linked to fixed annual prices or price floors, providing downside protection in a weaker spot market.
- Strong production growth pipeline with significant development optionality supports earnings growth outlook and valuation longer-term.
Mineral Resources (MIN)
- Low-cost lithium operations.
- Diversification underpins a degree of earnings resilience through the commodity cycle, with ~40% of EBITDA derived from lithium, and the balance driven by its (soon to be low cost) iron ore operations, along with its high-quality mining services segment which generates relatively stable contracted earnings.
- Strong production growth pipeline in all segments will underpin earnings growth. In the next five years, MIN is targeting lithium production to increase by 5x, iron ore by 5x and mining services contracted tonnes by 3.5x.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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