Lithium prices are tumbling in the international market, which is now turning into a warning sign from large investment banks such as JP Morgan to the major global lithium producers such as Albemarle, SQM, and Australian lithium mining companies.
Lithium chemicals, which once were hot investment opportunities in the lithium market, are also witnessing a rapid fall in prices, not because of the weak demand, but due to the large influx from the lithium miners into the market, which has created a supply glut.
Lithium chemicals, majorly, lithium hydroxide, which swept the lithium industry with hope over long-term growth projections, fell drastically, and again the demand was certainly not to blame. The lithium miners across the globe rushed to secure a dominant position in the market, and eventually created a situation, where there is more lithium available to the consumer, with vast options to secure the supply from different geographies.
As a result, lithium chemicals are now available at dirt cheap prices, with prices of per Kg lithium hydroxide at USD 11.25 (min 99.5 per cent, Battery Grade, CIF China, Japan, and Korea), and prices of per KG lithium carbonate of USD 9.25.
Investment Banks Downgrade Lithium Giants
JP Morgan, a prominent global investment bank, downgraded the giant battery metal producer and mentioned that the stock of the company is overvalued, which is more likely to get hampered from the oversupply concerns for the foreseeable future.
The chief executive of Albemarle -Mr Luke Kissam mentioned that the lithium producers across the globe have produced far more lithium, then was required by the EV industry, and reduced the target price of the company to USD 60 a share, down by over 11.76 per cent against the previous target price of USD 68 per share.
While many of the lithium miners sell their production via long-term contracts, the consumers have now started pushing for renegotiations in the wake of a drastic fall in the lithium prices. The market research and data provider- Benchmark Minerals Intelligence assess that the prices of lithium carbonate dived by 65 per cent since the beginning of 2018 to stand at USD 8,500 a tonne in China.
Defence Mechanism of Lithium Producers
To address the rising apprehension amongst the investors over the warning signs from JP Morgan, Albemarle addressed the investors and mentioned that the battery metal producer anticipates robust demand from the EV industry over the long-term despite troubles caused by the oversupplied market conditions.
Luke Kissam further mentioned that the company is confident in its ability to drive long-term value for the respective stakeholders.
Albemarle drummed the market with its robust financial targets for the year 2024, with a revenue forecast of USD 4.4 to USD 5.0 billion, which presented a 5-year compounded annual growth rate of 6.0 to 9.0 per cent.
The company also projects a CAGR of 12 to 17 per cent of its lithium revenue to 2024, and overall free cash flow of USD 0.8 to USD 1.0 billion.
Source: Company’s Report
The key assumptions under the projected financial outlook to 2024 remain as below:
- 5 per cent annual dividend growth, and 20 per cent effective tax rate; and,
- A USD 100 million sustainable run-rate savings from cost reduction initiative by 2021.
The cost-saving reflected an interesting point in the company’s strategy as it could be the most valuable input amidst oversupplied lithium market.
The Australian lithium miners such as Galaxy Resources Limited (ASX: GXY) had already implemented cost-saving measures to sail through the turbulent lithium market conditions.
To Know More, Do Read: Galaxy to Adopt Cost-Cutting Measures and leap into Lithium Downstream Processing
The Harpoon of Cost Cutting
While the market conditions remain turbulent over the lithium supply glut, the industry operators are clinching to the lithium demand forecasts and are sounding pretty confident that the demand would soon takeover and the prices would surge again in the market post the tip-out period of 2024.
By the time, demand takes over the supply, the global lithium miners, including the Australian lithium mining companies are using cost-cutting as the harpoon against the oversupplied big-fish, i.e., the lithium market.
In the status quo, another Australian lithium miner- Orocobre Limited (ASX: ORE) emphasised on cost- cutting to survive the downtrend in the lithium market, as was previously suggested by the behemoth miner- Rio Tinto Limited (ASX: RIO).
To better understand the market conditions, and to know the measures adopted by the lithium miners in the domestic market to minimise the impact of falling lithium prices, Do Read: Rio Gains Ticket to The Lithium Industry, While Mining Stocks Inch up on ASX- WSA, WHC
Orocobre Reduces Lithium Carbonate Price Guidance
ORE suggested the indicative weighted average price of lithium carbonate would stand at USD 5,400 a tonne (on a free-on-board basis) during the December 2019 quarter, as the market conditions remain soft.
The company decided to meet the current pricing to maintain the market position, and the Managing Director and CEO of the company- Mr Martín Pérez de Solay further indicated that the incentive prices for green-fields projects are now far above the lithium chemical prices in the international market, which requires the miners to predominately reduce the costs with operational efficiency to safe-guard their affairs against all the odds across the lithium space.
Is the Fall A Call to Investors?
The lithium market is oversupplied; this is what you will see in every research report to every media publication at the current moment. However, the drop in lithium prices could be seen as an attractive opportunity by certain market participants considering that the lithium-poor countries such as the United States, and Europe, are securing rapid supply to avoid bottlenecks over the anticipated expansion in the battery storage technology and EV penetration.
But, again, the investment case in the lithium industry would circulate around the risk appetite, time horizon, and other such needs of an individual investor, a case very similar to the emerging assets in Australia such as hydrogen and water.
To explore the investment case, Do Read: Hydrogen Gas- An Intriguing Oil-Demand Driven Investment Case and Australian Water Entitlement- An Emerging Alternative Asset
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