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An Overview of the Current Lithium Market: A Technical and Fundamental Analysis
Yesterday, I delved into an update on the uranium market, examining the latest price actions along with key demand and supply-side elements. Today, let’s pivot to lithium, which, like uranium, has been heralded as a major investment opportunity in recent years. However, it’s evident that lithium has faced challenges in living up to these expectations, particularly as its current market trajectory leans into a bear phase with no sign of reversal.
Technical Analysis of Lithium
To kick off our analysis, let’s briefly revisit the technical journey of lithium throughout this commoditized cycle. The last significant bull market for lithium began in late 2020, with lithium carbonate prices initially rising sharply. This is illustrated in the accompanying chart, where you can see the price fluctuations over time.
As of August 2023, the industry appears to remain entrenched in a bear market, indicated by a persistent downward trend in lithium carbonate prices. The technical indicators suggested a slight reversal by September, only for the price trajectory to shift back down into the long-term trend ribbon—a clear sign of ongoing supply-side dominance.
Historically, the last peak occurred in November 2022, where prices peaked at 597,500 RMB/mt, reflecting a staggering rally of 1,413% from the 2020 lows. However, post-peak, the trend shifted dramatically, with a distinct transition to a bearish market commencing in June 2023, as prices began to set lower highs and lows.
As things stand, the current price is significantly lower, showcasing a 90% decline from those earlier highs. The long-term trend continues to indicate that the market is not on the brink of recovery, especially as short-term trends show signs of strengthening downward momentum.
Another aspect worth noting is the emergence of lithium carbonate futures trading which began in July 2023. This new avenue provides a clearer picture of real-time price movements compared to historical data that had been obscured by extensive paywalls.
Fundamental Analysis Factors Impacting Lithium
Despite the discouraging technical indicators, it’s important to examine the fundamental drivers shaping the lithium landscape. According to a recent report by Morgan Stanley titled "Lithium Falling, Cobalt Holding," several critical factors come into play.
Demand Insights:
- Strong Growth Indications: The demand for lithium, spurred by battery electric vehicles (BEVs) and energy storage solutions, continues to exhibit robust growth. In particular, Morgan Stanley noted that BEV sales are surging, with a record high share of 32% in China as of April.
- Projected Improvement in Affordability: As we move into the second half of this year, improvements in affordability are expected to drive further demand, particularly in the US and Europe.
- Potential US-China Trade Dynamics: The rollback of tariffs between the US and China might also lead to increased demand for energy storage batteries.
Supply Dynamics:
- Oversupply Issues: The crux of the problem for lithium pricing lies predominantly in oversupply rather than lack of demand. Morgan Stanley indicated that current supply growth is substantially outpacing demand, resulting in elevated inventories and downward price pressures.
- Regional Contributions: China’s significant contribution to supply, with production surging by 65% year to date, alongside strong outputs from Australia, Brazil, and Chile, adds to the market’s oversupply condition.
Price Forecasts:
According to Morgan Stanley, for prices to regain strength, a reduction in supply is essential. However, many producers are focused more on cost-cutting rather than curtailing output, which complicates the price recovery scenario. The firm forecasts modest price increases in the coming years, estimating prices to rise to US$9,175 in 2025, US$10,250 in 2026, and US$12,375 in 2027, signalling a potential, albeit gradual, market recovery.
What Lies Ahead for Lithium Prices and ASX Lithium Stocks
The fluctuations in lithium prices demonstrate how market dynamics can dramatically shift within different phases of the commodity cycle. Despite increased demand, it’s the oversupply that continues to weigh heavily on prices—an irony that hampers opportunities for the producers and investors alike.
For those engaged in trading or investing in the sector, it raises the fundamental question of whether to adopt a trend-following approach or to remain steadfast in belief amidst fluctuating narratives. In the coming weeks, I intend to provide a more detailed technical versus broker analysis specific to ASX lithium stocks, which should serve as a valuable resource for navigating this volatile market landscape.
As we reflect on these developments, it’s crucial for all investors in commodities—particularly lithium—to remain aware of the ongoing cycles and the lessons they impart.
