Lithium majors climb despite caution by UBS, Morgan Stanley
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The news: Lithium stocks rallied on the ASX despite Morgan Stanley and UBS analysts warning that more supply cuts were needed to balance the continued market surplus.
The numbers: Arcadium Lithium (4.8%), IGO (3.1%), Liontown Resources (3.1%), Pilbara Minerals (2.3%) and Mineral Resources (1.2%) were all trading higher by 2:35pm AEST. Materials was the best performing sector on the ASX, up 2%, as the wider sharemarket rose 0.63%.
The context: UBS remains underweight in the sector, are 'sell' rated on IGO, Liontown and Pilbara Minerals, and 'neutral' on Arcadium Lithium. Analyst Dim Ariyasinghe said that despite positive read-throughs from output cuts by Chinese battery giant CATL last week, UBS would need to see more supply exits before turning positive on the sector.
Meanwhile, Morgan Stanley analysts said that "supply discipline is evident" in the sector following the CATL production cuts and the lithium price could stabilise by the end of the year. However, more supply cuts were needed to balance a growing market surplus, they said, and supply ramp-up and weak demand would likely keep the lithium market in surplus into the 2025 calendar year. They saw equities now reflecting these headwinds.
Morgan Stanley upgraded Pilbara Minerals from 'underweight' to 'equal-weight', but noted medium-term production recovery risks. IGO was kept at 'underweight' driven by risks around its Greenbushes mine plan and "likelihood of acquisitions".
Morgan Stanley cut its price target on Mineral Resources, by 21% from $70 to $55.50, due to projected lower lithium and iron prices until CY27.
However, it raised its price target on IGO by 8%, from $4.55 to $4.90, and on Pilbara Minerals by 9%, from $2.70 to $2.95 — both primarily due to higher lithium prices over the longer term.
The sources: Morgan Stanley research, UBS research
