ASX lithium stocks: where will lithium prices go next?

Many of the most popular ASX 200 stocks are in the business or either mining or processing lithium.

Pilbara Minerals, Mineral Resources, Allkem, Liontown Resources, Core Lithium, Sayona Mining, and dozens of small-caps have their share prices primarily dictated by the price that can be fetched for the silvery-white metal.

And lithium’s price — like so many critical minerals — is predominantly a factor of Chinese demand and wider global supply.

ASX lithium stocks

ASX lithium companies usually sell the majority of their product to Chinese processors, with much of it ending up inside Chinese EVs. It’s clear that the metal was the breakout commodity of 2022, rising by over 1,000% compared to pre-pandemic levels to a record 597,500 Yuan/tonne by mid-November.

However, lithium has now corrected down to 365,500 Yuan/tonne, a drop of 40% in just three months, a result of an aggressive pullback in demand expectations and signs of stronger-than-expected supply.

After years of subsidising battery manufacturers and providing incentives to consumers to purchase EVs, the Chinese Communist Party elected to halt these inducements for the $87 billion industry in January, forcibly dropping demand for battery input materials from auto manufacturers.

For perspective, the China Car Passenger Association saw retail sales of ‘new energy vehicles’ fall by 6.3% year-over-year in January, and by 48.3% from December, to just 332,000 units. However, much of this drop can also be attributed to the Chinese New Year, where celebrations were particularly exuberant after years of lockdowns.

It’s worth remembering amid the negatives that Chinese EV sales roughly doubled in both 2021 and 2022. While a slowdown is expected in 2023 amid a potentially global recession, Li Auto, NIO, and XPeng all saw sales rebound in February, leaving the near-term trajectory of sales uncertain. Add in a likely price cuts battle between Tesla and BYD, and rising demand could see prices start to rise again.

Moreover, CATL — a global market leader in battery manufacturing — took advantage of the subsidies in 2022 to manufacture excess batteries, which it is now selling at steep discounts, expecting lithium carbonate prices to continue falling in 2023. While this is depressing near-term pricing, longer-term lithium prices may start to rise again once the excess battery supply is sold off.

On the other hand, Australia is projecting that the global output of lithium carbonate equivalent will reach 915,000 tonnes in 2023, a rise of nearly a third on 2022’s output.

Lithium price trajectory 2023

S&P Global Insights analysts — in comments to Reuters — argue that further falls are likely, arguing that ‘it is quite a stretch to find the bottom for lithium prices because lithium producers will remain profitable under much lower prices.’

RBC Capital Markets analyst Kaan Peker thinks that ‘the decrease in spodumene prices has been quicker than what we anticipated,’ while Rystad Energy vice president Susan Zou comments that ‘demand is still healthy, but battery and EV makers are currently destocking instead of placing new orders. The subdued spot demand therefore is weighing on sentiment and pressing down prices.’

The business intelligence consultancy argues that the global market deficit will shrink to between 20,000 and 30,000 tonnes of lithium carbonate equivalent in 2023, down from 76,000 tonnes in 2022.

Meanwhile, Goldman Sachs analysts, who have been bearish on lithium for some time, think that supply will grow by circa 34% per annum against demand growth of 25% through to 2025. In a recent note, they argue that ‘the likely supply surge and downstream overcapacity are set to bring lithium prices down subsequently in the medium term.’

However, lithium companies themselves see reason to be positive over the longer-term supply gap. Albemarle thinks that China’s EV market will grow by 40% in 2023, while SQM CEO Ricardo Ramos thinks that lithium demand will reach ‘almost 1.5 million metric tons by 2025.’

Barrenjoey analysts comment that ‘while we remain positive on the long-term outlook for lithium, the short-term outlook is less clear, with a clear acceleration in China EV sales needed to allay market fears.’

Of course, the proverb for commodities is that high prices are the cure for high prices. However, it’s not clear that non-fungible lithium will be subject to the same depressive price pressures as say oil, or iron. The global economy does not yet rely on cheap lithium to run, and demand over the longer term could continue to steeply increase as auto manufacturing goes electric.

And while demand in China is currently the primary mover of lithium prices, European demand as ICE cars are phased out, and US demand in the wake of the Inflation Reduction Act, could serve to send prices higher over the longer term.

But predicting near-term pricing is currently more of an art than a science.

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