The global energy transition marathon and its demand for electric vehicles sent lithium demand into overdrive in 2022. Prices for the energy-savvy metal surged around the world over the past year, dragging lithium stocks on a bumpy ride. Now, analysts are reporting some more bearish views for 2023. In addition, the specter of possible OPEC-like alliance among three leading lithium producing countries weighs on industry prospects going into the new year.
Lithium is a highly efficient energy storage medium used in virtually all batteries currently powering electric vehicles as well as consumer electronics. The Benchmark Minerals' Lithium Price index has soared more than 180% in the past year.
Lithium carbonate spot prices in China, the biggest EV market and a huge user of lithium, climbed to a record $84,000 per ton in November. The precious metal was around 560,000 yuan, or $79,500, per ton this week in China, which also handles most of the world's lithium refining. Prices started the year at 244,510 yuan, or $34,700 per ton.
Meanwhile, lithium stocks, Sociedad Quimica Y Minra, Albemarle and Livent have advanced around 83%, 11% and 5% on the year, respectively. Exchange traded funds covering the space have been less fortunate. The Global X Lithium & Battery Tech ETF has lost more than 20%. The Amplify Lithium & Battery Technology ETF has dumped about 33%.
Against this backdrop, news reports last month said Argentina, Chile and Bolivia — country's sitting on some of the world's largest lithium deposits — were discussing a potential production and pricing pact. Rumors for years have stirred, expecting South American countries to angle for more control of lithium prices.
Lithium Stocks: Advanced Talks Around Lithium-OPEC
Telam, Argentina's national news agency, reported in October that representatives from the three countries have been in "advanced talks" on an agreement to give them control of global lithium prices.
The foreign ministers from the three countries also hoped to have Australia, the world's top lithium producer, join the cartel, Brazil's Rio Times reported.
A majority of the world's undeveloped lithium resources are in an area of South America known as the "Lithium Triangle." This region is made up of Chile, Bolivia and Argentina. The three countries hold roughly 58% of the world's lithium resources, according to the 2021 U.S. Geological Survey Mineral Commodity Summary.
Chile currently possesses the world's largest commercial lithium reserves. SQM and Albemarle are the only two producers operating in the country. Albemarle has two production sites in Chile. However, Bolivia is home to the globe's largest lithium reserves, according to the U.S. Geological Survey. However, Bolivia's vast stores are not yet considered commercially viable.
What Would A Lithium 'OPEC' Do?
Meanwhile, China dominates the world's lithium refining capacity. The country accounted for about 75% of the global lithium-ion battery production in 2021, according to the International Energy Agency.
China itself has extremely limited lithium reserves. However, the country is becoming more involved in South American lithium mining, including a recent $2 billion investment into two exploration projects in Argentina.
If Chile, Bolivia and Argentina, along with others, were to form a lithium cartel, analysts say it could influence lithium markets and prices the way OPEC does oil. The 13-member Organization of the Petroleum Exporting Countries wields immense influence over global oil production levels and, consequently, global crude prices.
Alice Yu, a senior analyst with S&P Global Commodity Insights, told IBD that an OPEC-style group for lithium that excludes Australia would be "difficult to realize in practice." Yu added that another complication is that Argentina's mining operations are controlled by various private companies, unlike in the 13 countries that make up OPEC.
If the cartel were to be created, it could mean higher costs for lithium. This would then be passed down to EV buyers and potentially curb electric vehicle demand, according to Yu.
An organization of lithium exporting countries, and higher lithium prices, could also lead to accelerated development of alternative, cheaper and more abundant battery chemistries, such as sodium-ion, Yu said. There has already been buzz in China around using sodium-ion batteries for the electric vehicle market.
But there are positives in the cartel plan for lithium.
"The discussion around the creation of a lithium-OPEC nonetheless reflects greater commitment from the respective governments to further develop their lithium resources, and to play a more important role in the global supply chain," Yu said.
What's Up With Lithium Stocks
SQM stock fell around 1% to 98.25 Tuesday during market trading. The Chile-based company currently has a cup-with-handle base pattern and a 112.45 buy point, according to MarketSmith.
SQM earnings are expected to end 2002 up 547% to $13.27, according to FactSet. Revenue for the Chile-based company is predicted to shoot up 260% to $10.4 billion. Analysts forecast 2023 full-year earnings dropping marginally to $12.97, while sales edge up to $10.9 billion.
Morgan Stanley analyst Javier Martinez de Olcoz Cerdan wrote on Nov. 17 that SQM could be approaching a "peak in earnings."
"Just to be clear, we are expecting great 4Q22 and 2023 results, but the incremental data suggest that we may be around the peak in this earning cycle," the analyst wrote.
He added that SQM lithium capacity is close to 180,000 tons and it is working to increase that to 210,000 tons. Morgan Stanley has increased its lithium capacity expectations in Chile to around 360,000 tons. In 2021, Chile produced around 150,000 tons of lithium, a little more than quarter of total global lithium production.
Albemarle: The U.S. Lithium Stock
Likewise, Wall Street expects Albemarle's 2022 EPS to grow 411% to $21.08 while revenue spikes 120% to $7.3 billion. In addition, analysts polled by FactSet expect ALB earnings to add another 30% in 2023, coming in at $27.36 per share. The sales target for the lithium producing giant is $9.9 billion in 2023, an increase of 36% compared to its estimated 2022 revenue.
ALB dropped 1.7% to 273.39 Tuesday. The stock scored a breakout in mid-November, then quickly fell more than 7% to 8% below the buy point. That triggered the automatic stop-loss rule.
Charlotte, N.C.-based Albemarle is the world's largest lithium producer and one of the leading providers of lithium for electric batteries. The company already supplies the crucial metal to Tesla. Along with its lithium segment, the chemical manufacturing company also has bromine and chemical catalyst refining operations.
Albemarle Plots Decade-Long Lithium Charge With Demand Racing Past Supply
Albemarle stock has a 97 Composite Rating out of 99. It has a 90 Relative Strength Rating, an exclusive IBD Stock Checkup gauge for share-price movement that tops at 99. The stock's EPS rating is a solid 91.
The Bears Are Coming: Lithium Stocks And Prices
Goldman Sachs recently affirmed its bearish lithium outlook, projecting that supply will begin to outpace demand from 2023 onward.
With weak global economic growth expected in 2023, one critical question is the extent to which burgeoning EV demand will defy cyclical pressure. Goldman Sachs expects lithium supply to flip from a 84,000-ton deficit this year to a 76,000-ton surplus, as softer demand meets higher output. Yet lithium supply forecasts have a history of being optimistic.
In November, Albemarle reaffirmed full-year guidance for EBITDA (earnings before interest, taxes, depreciation and amortization) growth of 500% to 550% in litsw lithium unit. The guidance built in potential for upside in lithium prices, but also some possible downside for Q4 volume growth, if production ramps hit some speed bumps.
Automakers and battery suppliers are currently scrambling to lock down the lithium supplies to meet EV sales targets for 2024, 2025 and beyond. In July, General Motors agreed to pay Livent $198 million in advance to secure supply starting in 2025.
The International Energy Agency (IEA) has also predicted annual lithium demand will increase to 2.5 million tons by 2030, up from around 500,000 tons today.
Lithium Stocks: Morgan Stanley Outlook
A lithium market outlook report from Morgan Stanley analysts on Nov. 28 said "with demand headwinds looming, we believe a near-term (lithium) price correction is in sight."
Morgan Stanley predicts the strong EV demand in 2022 is unlikely to carry over into 2023. So far in 2022, global EV sales are up 70%, or around 2 million units, according to Morgan Stanley.
"We see a price inflection in 2023, as decelerating demand growth will ease market tightness. However, a longer-term lithium supply shortfall could slow the EV transition.
Morgan Stanley is expecting a 22% year-on-year increase, or around a 1.8 million unit rise, in EV sales in 2023.
In China, where EV sales are up 90% on the year, Morgan Stanley says "there appears to be 'overproduction' of batteries."
With EV purchase subsidies phasing out in 2023, analysts forecast China's EV sales will also slow. The drop off in sales, in turn, would drive lithium prices in China lower. Morgan Stanley forecasts prices of $67,500 per ton in the first half of 2023, falling to $47,500 per ton in the second half of the year.
"A price correction is due, as extreme market tightness is likely to unwind in 2023," the analysts wrote. Morgan Stanley projects lithium demand to expand by 10% in 2023.
The Inflation Reduction Act, Tesla And Lithium
The Biden administration's Inflation Reduction Act (IRA) includes billions of dollars in EV incentives. A strong piece of that support encourages domestic U.S. lithium operations, in an effort to loosen China's stranglehold on lithium processing.
There are benchmarks EVs must meet to be eligible for tax credits in the new law. By 2024, EV batteries must have at least 40% of minerals extracted or processed domestically. That would rise to 80% in 2027. The other option is sourcing from a country that has a free-trade deal with the U.S.
Tesla is already eyeing the prospect of building a lithium processing facility in Texas, as the company looks to take more control over key manufacturing components amid rising prices.
Tesla has said commercial production could get underway by the end of 2024, if the project wins project approval. Also, in Tesla's second-quarter earnings call in late July, Musk did some hawking for the lithium trade.
"I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can't lose. It's a license to print money," Musk said.
Albemarle is also likely to receive federal support through the Inflation Reduction Act. Albemarle has the only lithium mine currently operating in the U.S. The company announced on Oct. 19 it would receive around $150 million from President Biden's infrastructure bill. The funds will go toward expanding its U.S. lithium battery manufacturing, the company said.
Lithium Stocks: Lithium Projects Coming To the U.S.
Yu, of S&P Global Commodity Insights, said the Inflation Reduction Act is expected to "accelerate the commissioning of new lithium projects in the U.S."
Yu added the U.S. will need its Free Trade Agreement partners to meet plug-in electric (PEV) battery demand.
S&P Global Insights estimates that U.S. lithium production will only meet 25% of the country's lithium demand in passenger PEVs by 2026. Yu said the combined lithium production from Canada, Mexico and U.S. increases this value to around 99%.
"We could see changing investment dynamics as a result of the IRA, leading to the emergence of new lithium investment flows," Yu said.
Canada has recently ordered three Chinese companies to divest their stake in three Canadian lithium miners, according to Yu.
"The move demonstrates that the North American PEV supply chain is actively pivoting away from China — as a source of both material and capital," she said.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
