Market divided on 'Tesla effect' on lithium stocks: sources

The jury is out on whether lithium-linked equities rode higher at the start of 2020 solely on the coattails of Tesla's bull run, or if the world is waking up to an increased drive towards a sustainable future, sources say.

Without doubt, both sides can be argued successfully. Looking at Tesla's outperformance since the start of the year, in hindsight, it seems inevitable that lithium equities would track higher. However, that does not escape the fact that the physical market remains on its knees.

S&P Global Platts' seaborne lithium carbonate assessment was unchanged for the eighth consecutive week at $7,250/mt, while lithium hydroxide held steady for a ninth straight week to $9,500/mt. Both assessments are for battery-grade material delivered on a CIF North Asia basis — considering the main ports of China, Japan and South Korea. Platts' lithium hydroxide assessment started 2019 at $16,000/mt.

Battery packs for electric vehicles use around 15-20 kg of pure lithium each, according to industry estimates.

When it comes to equities, larger listed producers such as Australia's Albermale, Chile's SQM and China's Tianqi all saw a positive start to 2020 in the face of stagnant physical conditions.

Albermale started the year around $73/share, according to S&P Global Market Intelligence data, hit a high of around $90/share at the start of February and at 1720 GMT was bid around $85/share.

SQM started 2020 around $27/share and is currently bid around $30/share after posting a year-to-date high of almost $32/share.

The main driver, according to sources, has been the ramping up of Tesla's share price. It started 2020 at roughly $430/share before rocketing to an all-time high of around $970/share. It has since come off a little, and was bid around $775/share as of 1720 GMT.

The Tesla Model 3 was the world's most popular plug-in electric vehicle with almost 146,000 vehicles sold globally in 2018.

"Some investors are getting more bullish [on the outlook for] future electric vehicle demand, [largely due] to optimism towards Tesla and the possibility of the company making money from EVs [sooner than planned]. Still, stocks are very volatile and may [retreat] with the next piece of negative news," one banker told S&P Global Platts.

The situation for Tianqi is a little different, it too caught the Tesla wave, but was already tracking higher towards the end of 2019 on the back of talk that China may not ditch its EV subsidy program as planned.

This was confirmed at the start of 2020, helping keep the stock elevated. However, it was quickly dumped by investors as news of the coronavirus outbreak shuttered China's doors.

CORONAVIRUS

Some analysts expect the coronavirus outbreak to weigh on EV demand, especially in China, which could also dent lithium demand.

The stock rose from around $3/share on December 25 to a high of $5/share January 14. It was bid at roughly $4 as of 1720 GMT.

In addition to dealing with the coronavirus crisis, the Chinese market has been generally frozen for the past couple of weeks due to the Lunar New Year holidays.

Still, although the "Tesla effect" was widely acknowledged to have played a part, so too were a variety of other factors.

"On the supply side we've seen a lot of producers shutting down mines [as they are losing money], postponing or canceling conversion plants etc. It means less product is coming in the pipeline [over] the next few years. At the same time, things on the demand side are positive, China [has not reduced its] subsidies further for now, Telsa's performance, Europe looking to create its own supply chain etc. Overall, the market balance [further out] looks better," said one sell-side source.

A second source was also bullish on the overall picture, as well as the outlook for a possible continued rally in Tesla's share price.

"Some may think Tesla has defied gravity, but maybe not? People said the same of Amazon when it started trending higher," he said.

"Sustainable investing is on everyone's radar. Tesla has amplified that. The rest of the auto industry is now playing catch-up, no one wants to be the Kodak of the car industry," he added.

Kodak was famously caught out for not buying into the transition to a digital future, focusing instead on traditional photography, much to its detriment.

Last year was marked by a growing prevalence of environmental, social and governance (ESG) considerations among the mining financing community, with the realization that natural resources companies will "inevitably have an impact on the environment, so that having a 'social license to operate' is essential to help them manage risk and is a key pillar for generating long-term investment performance," Evy Hambro, global head of thematic and sector investing at BlackRock, said.

A trader said of the recent run higher in lithium stocks, "from my understanding, this is a speculative effect related to, among other things, Tesla's share price and the turnaround in China's subsidy approach. [Still, the] fundamental market of raw materials, including lithium, remain unchanged from 2019 to date ... therefore not justifying any rise [in my view]."