The global lithium market is experiencing unprecedented levels of volatility, mirroring the characteristics of the element itself, which is famously the most volatile metal on the periodic table. This volatility has not spared ASX-listed lithium miners, whose share prices have been on a roller-coaster ride in recent weeks.
Lithium carbonate futures prices have been at the centre of this turbulence, with last week witnessing two down-limits and two up-limits for the contract set to expire in January 2024. Such dramatic fluctuations in the lithium futures market have raised concerns about their potential impact on the sentiment of lithium equity investors, as noted by Macquarie.
Trading in lithium futures contracts is halted when prices reach daily up or down limits, creating an environment ripe for price swings. Macquarie analysts suggest that the futures market could continue to experience turbulence in the short term, citing factors such as physical delivery instead of cash settlement, evolving product specifications, and tightened magnetic impurity requirements.
Compounding this volatility is the fact that lithium production, which briefly resumed in November, is once again facing headwinds due to deteriorating profitability for marginal players in response to lower lithium prices. China's lithium carbonate production is expected to decrease by 5 per cent month-on-month in December, further contributing to market uncertainties.
Lithium prices have retreated more rapidly and to lower levels than consensus expectations. Citi's global commodity team has responded by reducing its lithium price forecasts by a significant 20-30 per cent for 2024.
Despite these challenges, there are potential positive catalysts on the horizon. Citi has highlighted the possibility of a short squeeze on the Guangzhou Future Exchange before year-end, and it anticipates a price reprieve in the third quarter of FY24 as a result of post-Chinese New Year restocking.
In this volatile landscape, Citi recommends Mineral Resources for investors, citing its iron ore exposure as a stabilizing factor. Pilbara Minerals, on the other hand, has been downgraded to Neutral based on valuation but remains highly leveraged to any potential bounce in lithium prices.
Macquarie has also assessed the sensitivity of major lithium producers under its coverage universe to lithium price changes. Mineral Resources emerges as the most sensitive, with more than a 15 per cent earnings movement for every 10 per cent change in lithium prices in FY24. Pilbara Minerals and Allkem both exhibit approximately 10 per cent earnings changes with a 10 per cent move in lithium prices, while IGO's sensitivity is around 6 per cent in FY24. Allkem's valuation is particularly responsive to lithium price shifts, with a 10 per cent increase in lithium prices over the asset's lifespan translating to a 20 per cent boost in net present value.
