One of the world’s most eminent investment banks, Morgan Stanley, has thrown a potential spanner in the works of the burgeoning lithium industry.
In a research report published this week, the bank predicts the current growth of electric car sales to undershoot current expectations, thereby stoking fears that previous lithium supply shortages will become a redundancy and possibly leaving stockpiles of the metal unsold.
One of the major takeaways from the report, is that Morgan Stanley stipulates a required rate of 31% of all new cars sold being of the electric variety, for the current rate of lithium supply to balance with demand.
The bank says the current rate of new electric cars sold is only around 2% and would have to rise significantly to at least 31% by the year 2025 to “clear the market.”
Morgan Stanley’s research directly contradicts consensus analyst estimates of a lithium supply shortage, but despite its minority-held view, markets reacted negatively to the controversial research report.
Albemarle shares closed down more than 7%, while its biggest rival SQM fell by more than 8% over the past two days. Morgan Stanley analysts also downgraded their ratings to “underweight” from “equal weight.”
Over in China, BYD shares, a major Chinese battery and electric car maker fell 3% but continue to trade more than double their price in 2015.
Morgan Stanley’s report goes on to forecast spot lithium prices to fall by around 45% by 2021 on the back of around 500,000 tonnes per annum (tpa) being added to global supply by 2025.
Morgan Stanley forecasts the price of lithium carbonate will fall from US$13,375 per tonne to $7,332 per tonne by 2021, and then towards its marginal cost of production at $7,030 per tonne thereafter.
Hundreds of junior explorers have gone out in the field over the past two years, in search of high-grade lithium endowments at either brine lakes or hard-rock lithium mines.
Morgan Stanley expects the forthcoming additions to global supply to “swamp forecast demand growth,” and has therefore warned clients of lithium market overexuberance.
Scooping the lithium market
Mobile phones, laptops, tablets and electric cars have emerged as the front-running products to which the lithium-ion battery industry is most connected to.
A variety of companies from different sectors have begun to secure ample lithium supplies in order to facilitate ambitious production schedules that are expected to put over ten million new electric cars on the road just in the US alone, within the next 5 years.
Carmakers such as Tesla in the US and BYD in China, who estimate even steeper electric-car adoption rates, are responding to consumer demand for more efficient and reliable vehicles, but this has put pressure on existing supplies which many analysts predicted would be insufficient on a global scale.
But according to Morgan Stanley, Chile as a standalone country “threatens” to add at least 500,000 tonnes of lithium production in the coming years, thereby deflating any lithium inflation fears. The bank also says that “it would take much higher EV penetration rates to offset these surpluses.”
According to the Financial Times, Tesla is in talks with Chile’s SQM oversupply of lithium hydroxide, while other companies such as BMW and Volkswagen have also been rumoured to be in direct discussions with lithium miners.
Apple, the maker of the iconic iPhone, was recently reported to be in talks with cobalt suppliers for the same reasons i.e. securing reliable supplies of critical raw materials required for its wide range of battery-powered products.
Power Metals in the Top 50
Despite Morgan Stanley’s downbeat report, it’s not all doom and gloom in lithium mining this week.
Power Metals Corp (OTC: PWRMF) (TSX:PWM), a premier lithium developer currently worth around C$60mil, just announced they are included in the top 50 best performers across 5 industries listed on the Toronto Ventures Exchange.
Its shares rose by over 1.67% on the news with analysts noting that the company has already locked in funds to invest towards 2 more drilling programs this year.
Power Metals Corp announced the completion of the January 2018 Northeast Dyke drill program at its Case Lake Property, Cochrane, Ontario, where a total of 30 diamond drill holes comprising of 3,020 metres have now been completed. The drilling successfully intersected multiple course-grain pale green spodumene zones at shallow depths and over good intervals. All assays have been shipped to SGS Canada Inc. in Cochrane, Ontario, according to Dr. Julie Selway, VP of Exploration.
Power Metals has also announced that they are now planning the spring/early summer exploration program on Case Lake Property, Cochrane, Ontario which will consist of two parts:
The spring/early summer drill program will target the area between the Main Dyke and the Northeast Dykes (Target 2). Coarse-grained spodumene pegmatite was intersected in the 5400 m drill program on the Main and North Dykes and in the 3020 m drill program on the Northeast Dyke, both recently completed. The Northeast Dyke is located 900 m northeast along strike of the North and Main Dykes and is within the same tonalite dome as the North and Main Dykes. Since the Northeast, North and the Main Dykes are along the same strike and within the same dome, this indicates that they were emplaced along the same deep-seated structure. The drill program between the Main and Northeast Dykes will test the presence of the spodumene mineralization along strike.
A drill program will test spodumene mineralization identified during the mapping program on granitic outcrops west of the Main Dyke (Target 3).
Additional targets will be drilled in fall 2018 including the East Dyke (Target 4), down dip extension of Main Dyke (Target 5) and dome targets identified during the spring mapping program.
The Oracle of Omaha, otherwise known as Warren Buffett, has a trading idiom for this very situation; and he would be a good person to ask given his previous $230 million investment in BYD, a Chinese carmaker, who back in 2009 were only starting to commence electric vehicles sales. Now they are the biggest seller of electric vehicles.
"If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes."
With electronics manufacturers scampering to secure viable supplies of lithium and cobalt, maybe they have more to worry about than they first feared. Or maybe, they are best advised to secure short-term supplies before their competitors do.
In hindsight it will be clear how much lithium and cobalt was required for 2018 and beyond, but with today’s outlook, there is uncertainty abundant amidst the ongoing battery-powered energy storage revolution.
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