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Macquarie sees lithium as the new wonder resource in the mining sector

Investors and analysts are finally taking note of lithium, and so they might as demand is expected to systematically outstrip supply in a few years, according to brokers at Macquarie Research
Macquarie sees lithium as the new wonder resource in the mining sector
Will there be enough of this to go around?

Investors and analysts are finally taking note of lithium, and so they might as demand is expected to systematically outstrip supply in a few years, according to brokers at Macquarie Research.

In 2015, demand outstripped supply, and although that is expected to continue in 2016 before switching in 2017 and 2018, from 2019 to 2021 there is expected to be a widening deficit of Lithium globally.

According to the broker's estimates, in 2019 demand for Lithium will be 239,000 tonnes while supply will struggle to match, at 233,000. In 2020, demand will be 260,000 and supply only 237,000, while in 2021 demand could be 283,000 and demand still 237,000.

But while demand will continue to grow, the broker explains that the supply valve may be loosened, resulting in lower prices and a slowdown in supply.

"In sharp contrast to other commodities, prices took off in 2015 and have continued to rise, as the long-anticipated electric vehicle story took off," Macquarie said.

Lithium demand was up 8% year-on-year overall and 22% year-on-year in batteries last year. The rally has been aided by established producers consciously not lifting output to meet this demand. The result is a China imported lithium carbonate price up 50% since the start of last year, from $4,700/t to $7,000/t in April.

"Based on our detailed supply/demand analysis, we believe that having gone into deficit last year the market will remain tight through 2016 and 2017, despite more supply coming from Australia and Argentina. As a result, we are bullish lithium on an 18-month view, with an average price target of $8,250/t for 2017. This annual average represents 16% upside from current spot, but on a shorter-term basis, overshooting into the mid-to-high $8,000s per tonne looks likely," researchers said.

"In a world where many commodities are struggling for any consumption growth, we believe lithium has the most compelling demand story. We forecast a CAGR of 9% to 2021. New energy vehicle (NEV) batteries are the essence of the story and forecaststt demand from this sector grows at a 31% CAGR to 2021, at which point they would account for one-third of all lithium demand versus just one-tenth today. We think external consultants are underestimating this demand potential," the broker adds.

"Structurally, lithium has no supply capacity constraint. Four producers control 90% of global output and are producing well below capacity, we believe in an attempt to support prices. This has worked so far, but there is a swathe of new capacity planned from 2018, which is looking increasingly viable following the recent rally. We believe to protect market share and keep new entrants out existing producers will be forced to raise volumes. As a result, our expectation is that prices reach a turning point in late-2017, and then start heading lower. Investors should be aware that existing assets plus two Australian mines starting this year could theoretically meet all projected demand growth."

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MACQUARIE GROUP LIMITED Timeline

Newswire
April 30 2009
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February 04 2009

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