The peak of the lithium price is approaching, be careful

Leading analysts are warning investors to be careful with lithium, predicting it is approaching its price peak.

Lithium is the star of the mining industry and is expected to remain so into next year, but it would be unwise to ignore some of the warning signs that point to the approaching lithium peak, if not. already there.

Whether the price of the main battery metal can rise further is a question to consider, if only because of the immutable law of investment gravity – what goes up eventually goes down.

Most major investment banks see lithium prices staying around their current high levels for at least the next 12 months, but after that it could be a case of falling over a price cliff. .

Analysts predict declines

Goldman Sachs uses an average lithium hydroxide price of $41,318 per tonne for this year in its calculations, before a slight drop next year to $39,060/t, then a rise in 2024 to $13,125/t. t.

Citi is a bit more bullish, pricing lithium hydroxide in its spreadsheets at US$58,465/t this year, US$40,438/t next year, then US$25,000/t. in 2024.

Macquarie is using a price of US$57,6008/t for lithium hydroxide this year and US$57,000/t next year, with a decline only beginning in 2026, after which the price drops to US$22,000/t. t in 2028.

Six important observations should be made about these predictions:

  • They all point to exceptionally strong lithium earnings for at least the next 12-24 months, which will ensure investor support for most companies in the sector.
  • Prices are bank predictions (best guesses?) and as the Danish physicist Nils Bohr said so well: “Prediction is very difficult, especially if it concerns the future”.
  • The prices relate only to lithium hydroxide, one of the many forms in which the metal is traded. It can also be sold as semi-processed ore (spodumene) or lithium carbonate.
  • Most lithium is sold privately with the world’s largest metals market, the London Metal Exchange, creating an open and transparent platform that will trade lithium hydroxide.
  • Lithium exploration stocks are not directly affected by the price of the metal if they have a good discovery story to tell, as profit margins will remain nice even after a 50% drop in the price of the metal.
  • Stocks at risk are those of producers climbing high on what is currently an inflated price that will fade as supply increases to meet demand.

Miners take advantage of prevailing high prices

Locally, the big news for lithium prices is the spectacular returns Pilbara Minerals (ASX:PLS) is enjoying from online bids traded on the Battery Material Exchange with a sale earlier this week at a price equivalent to US7830/t for 6 % spodumene.

That price is about 10 times what it costs Pilbara to produce spodumene, which is why the relatively new company has seen its profits and share price skyrocket over the past two years.

From a low of $0.13 at the onset of the Covid pandemic in early 2020, Pilbara rose over 3,000% to $5.07 – down slightly from an all-time high hit last week of $5.61.

Pilbara’s rush from small cap status just over two years ago to the top 50 ranks on the ASX with a market value of $15 billion is a factor in a corporate deal that would be in emerging in another lithium producer, Mineral Resources (ASX:MIN).

The plan being worked on within Mineral Resources is believed to be the spin-off of its lithium assets to catch up with the current high multiples applied to pure play lithium companies.

It is probably a source of annoyance to the management of Mineral Resources that their business, which includes iron ore mining and engineering services as well as lithium, has a market value $13 billion lower than that of Pilbara Minerals, which is a pure play action.

But lithium’s potential fallout on mineral resources sits at an ominous point on Lion Selection’s “investment clock,” which is tracking momentum in the mining sector with six on the clock being boom conditions and 12 the start of a crash.

lithium peak

Big new floats, as the mineral resource lithium rotation can be called, is at 11 o’clock on the clock in Leo, meaning it’s an end event cycle at the turn of the clock.

An earlier indicator of lithium’s peak was a late May comment from Goldman Sachs that “the lithium bull market was over for now,” and although that was obviously untrue at the time because the price of lithium continued to increase, a second major bank last week warned customers to be careful with lithium.

Morgan Stanley said it was raising a “yellow flag” on the price of lithium after a surprise price drop received by SQM, Chile’s largest producer of the metal, received during a shipment to China.

The drop in prices, for a cargo of lithium carbonate at 55,000 USD/tonne against 70,000 USD/tonne the previous month, could have been the result of poor quality material, which is why the bank is only raising a yellow (warning) flag rather than a red flag. flag to signify a serious turn in the market.

The problem for investors is what to believe when it comes to lithium, with the metal’s positive side comfortably outweighing the negatives, just as they seemed to be in 2018 before a flood of supply drowned out the asks and only kills the price.

This time around, the lithium market is much bigger thanks to the rush for electric vehicles and supply is struggling to keep up.

But if there’s one certainty about lithium, it’s the element’s abundance in the earth’s crust, especially in outback Australia, along with Canada, the United States and other reliable mining jurisdictions that have just joined the lithium rush.

For now, lithium is the top sector for investors in mining stocks, but it’s unlikely to be this good forever and there are warning signs for anyone willing to watch.

Carol N. Valencia