ASX-listed lithium producers believe the downward spiraling Chinese domestic lithium prices which have hammered their stocks have bottomed, while analysts say the industry's "horrific" track record in delivering new supply as planned has sparked a share price rally that could have deeper significance.
China's domestic lithium price falling some 40% in 2018 has seen those stocks also track downward, yet notably spiked after or towards the end of each quarter even amid some disappointing production and ramp-up results amid competitors.
ASX-listed producers' stocks soared barely a week after Canaccord Genuity mining analyst Reg Spencer addressed the International Mining and Resources Conference in Melbourne, Australia, on Oct. 30 on the lithium market, including Kidman Resources Ltd. (up 50%), Orocobre Ltd. (40%) and Galaxy Resources Ltd. (30%).
However, the last quarterly results across several global producers were disappointing, with Galaxy missing production guidance and Tawana Resources NL downgrading its fourth-quarter production. Financial services firm Morgans downgraded its estimate of Orocobre's lithium carbonate equivalent production for fiscal 2019 after the producer's Olaroz joint venture in Argentina reported 36% less production in the September quarter compared to the June quarter.
Meanwhile, Sociedad Quimica y Minera de Chile SA reported a five-week delay to its lithium carbonate plant in Antofagasta, Chile, due to new component calibrating and fine-tuning, and Albemarle Corp. also missed targets and deferred two expansion projects in the country.
"The price coming off in China has had a material effect on lithium equities, and then it is absolutely true that supply continues to disappoint," Pilbara Minerals CEO Ken Brinsden told S&P Global Market Intelligence, though he added that his own company seems to have defied the latter trend.
Spencer said the best-performing stocks are those that have had the greatest short positions, noting that, at its peak, Orocobre was 18% short interest, Galaxy 16% and Kidman 9%, while Albemarle had about US$1 billion of short interest in the stock, and thus concluded that the recent rally "wasn't necessarily new buying coming in but short covering."
He believes the supply disappointments were "a reminder to everyone that the market assumes companies can just bring these things online on time and on budget, but the lithium industry is probably the worst of delivering new supply as planned. It has a horrific track record."
Though CRU does not see the Chinese price bottoming, both Brinsden and sources from other ASX-listed lithium producers expressed views to the contrary.
"There's a lot of high-cost production in China and there's no doubt in my mind today that a lot of that would be under water, or a decent chunk of it. So it seems almost inconceivable to me that the price keeps falling," Brinsden said.
Financial services firm Reach Markets said after a recent meeting with Orocobre executives that the recent drivers of weakness in Chinese spot prices means low quality supply found its way back into the spot market after it was rejected by cathode manufacturers. Some China-based brine production have also ended back into the spot market, and there has been a lag in demand from some battery manufacturers, but the companies are starting to come back on.
"There appears to be demand sitting on the sidelines hoping to buy at a cheaper price however some of the cathode manufacturers are reporting significant increases in their order books (+50% to 60% change) and hence they will need to come back into the market to purchase raw material," Reach said in an Oct. 8 note. "Therefore, the company expects a rally in spot prices leading into the end of the year driven by demand (also assisted by seasonal demand)."
ASX-listed producers often argue that Chinese domestic prices do not reflect the ex-China prices such as the free-on-board South America prices achieved.
S&P Global Platts Metals Pricing Analyst Marcel Goldenberg said in an interview that Chinese domestic prices are subject to the "intrinsic volatility of any active spot market, while seaborne prices for material shipped out of South America are usually negotiated under term contracts."
"Hence, regardless of the current downtrend seen in China, prices on a FOB South America basis kept firm at higher levels due to the higher price environment they were negotiated at the end of last year when the overall market price was higher than today," he said.
"The only exception to this is SQM, which renegotiates prices every quarter — and in this case, they indeed reduced prices as confirmed in their last second quarter earnings call. Moreover, South American suppliers also have important customers in North America and Europe who are unlikely to import the Chinese material, which differentiates them from other consumers in Asia."
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.