Why We Continue to See Higher Prices for Lithium

On Oct. 18, lithium stocks plummeted following a sell-side broker’s downgrade for Albemarle ALB and SQM SQM. This was because of expectations that the lithium market will see a supply surplus in 2024 and 2025, leading to lower prices. We disagree, and continue to forecast a price rebound as strong demand growth outpaces supply, leading to a deficit in 2024.

In our view, rising electric vehicle adoption and the increasing buildout of energy storage systems will keep lithium demand growing to surpass 1 million metric tons in 2024, from 800,000 in 2022, eventually hitting 2.5 million metric tons by 2030. While we see rising supply, we think enough projects will face delays to maintain a market deficit as demand grows. If there were little or no supply delays, the market could see a surplus (and falling prices) over the next several years. However, given that much of the new supply will come from greenfield projects, which have historically faced delays in nearly all resource extraction industries, we think a scenario in which all new supply enters the market on time is unlikely.

With no changes to our outlook, we maintain our forecast for lithium prices to rise in 2024 and to average a little over $30,000 per metric ton from 2023 through 2030. While we expect prices will remain volatile, we think a market deficit will generally keep them above the marginal cost of production of $20,000 per metric ton on an all-in-sustaining cost basis. With our changes to our forecast, our fair value estimates for the lithium producers under our coverage are also unchanged. We view the U.S.-listed lithium stocks under our coverage as materially undervalued, with the Oct. 18 selloff offering a larger margin of safety for long-term investors.

Based on moat and valuation, our top lithium stock picks are Albemarle, Livent LTHM, and Lithium Argentina LAAC, all of which trade in 5-star territory at less than 50% of our fair value estimates.