The future of electric vehicle (EV) sales and the availability of lithium, a key component in their batteries, seems to be heading into a period of uncertainty. One analyst has recently downgraded two major lithium miners, citing concerns about disruptions in the supply and demand dynamics of the commodity.
On Wednesday, analyst Charles Neivert from Piper Sandler downgraded both Albemarle (ticker: ALB) and Livent (LTHM) from Buy to Hold. He also revised his price targets for the companies, slashing them to $155 and $19, respectively, from his previous estimates of $255 and $33.
Neivert wrote, "Over the next 12 to 24 months, the lithium market may encounter various challenges that will collectively slow down the growth of lithium demand, while supply increases are expected to rise."
One of the challenges highlighted is the decline in EV demand due to macroeconomic factors. Although EV sales are still breaking records in the U.S., Europe, and China, slowing economies and high interest rates are making new car purchases more expensive. Many consumers finance their car purchases through credit, and the impact of high car prices has been a concern for Tesla CEO Elon Musk. Despite frequent price cuts by Tesla, the higher interest rates have made monthly car payments barely manageable for customers.
As a result of these challenges, Neivert has reduced his estimate for lithium demand for EVs in 2030 by approximately 15%. This means that around 40 to 42 million battery-electric vehicles (BEVs) are projected to be sold in 2030. While this is still an impressive number, it represents a decrease of about 8 million vehicles compared to previous expectations. Nevertheless, it is still a significant increase compared to the forecasted BEV sales for 2023.
The Challenges Faced by Lithium Producers in a Changing Market
The global demand for lithium, a crucial commodity for various industries, has significantly increased in recent years. However, this surge in demand has also brought its own set of challenges for commodity producers. As new lithium projects are being constructed around the world, from Chile and Argentina to Canada, the United States, China, Australia, and Zimbabwe, there is a concern that the rapid growth in supply might outpace the demand.
According to industry expert Neivert, the completion and ramp-up of these projects could result in a constant influx of new lithium capacity on a monthly basis until 2030. This excessive supply coupled with a slowing demand can inevitably lead to a decline in pricing, thereby impacting the earnings of commodity producers. Consequently, many lithium producers are now facing the need to reduce their target prices.
In the past year, the lithium market has witnessed significant fluctuations. While the issue wasn't an insufficient supply, high lithium prices forced buyers to rely on existing inventories instead of purchasing new lithium products. As a result, benchmark lithium prices have plummeted from approximately $80,000 per metric ton to $25,000 per metric ton, causing considerable setbacks for companies like Albemarle and Livent. Both these companies have experienced approximately a 50% decrease in their stock value over the same period.
In premarket trading, Albemarle stock has dropped by 2%, while Livent shares have experienced a decrease of 0.7%. S&P 500 futures have decreased by 0.4%, and Dow Jones Industrial Average futures remain steady.
According to FactSet data, around 79% of analysts covering Albemarle recommend buying the stock, with an average target price of about $242. Similarly, approximately 79% of analysts rate Livent stock as a buy with an average target price of about $29. A noteworthy fact is that the average buy-rating ratio for stocks in the S&P 500 stands at around 55%.
In conclusion, the evolving dynamics of the lithium market have posed significant challenges for producers. While the increased demand is favorable, the growth in supply must be carefully managed to prevent oversupply and subsequent price reductions. The future of lithium production will depend on finding the right balance between meeting demand and maintaining sustainable pricing levels.