Lithium stocks extend gains on reported output cuts in China
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The news: Lithium stocks extended gains on the ASX, boosted by reported output cuts by Chinese battery giant Contemporary Amperex Technology Co (CATL).
The numbers: Lithium miners Mineral Resources (8.7%), Pilbara Minerals (6.9%), IGO (5.8%), Arcadium Lithium (5.1%) and Liontown Resources (4%) were all trading higher by 11:40am AEST, having notched major gains on Wednesday.
The rally continued as Citi analysts said they expect lithium to "bounce 20% to 25%" over the next two to three months, with reported supply curtailment by CATL expected to see the market running at a small deficit.
Citi consequently lifted its price targets for lithium salts over the next three-month period from $10,000 per tonne to $14,000 per tonne for carbonate and $14,200 for hydroxide.
UBS analyst Levi Spry said that CATL's Jiangxi lepidolite mine, which has reportedly suspended production, accounts for around 5% of global primary supply and approximately 20% of China's supply.
Spry said that this news "is expected to be positive on lithium prices", assuming spodumene prices of up to $1,000 per tonne in the near-term, compared to current spot prices of around $730 per tonne.
The context: Citing channel checks with contacts, UBS said that CATL suspended its lithium lepidolite operation at a Jiangxi mine following a meeting on Tuesday. CATL also plans to make adjustment to the lithium carbonate production in Yichun, Bloomberg and Reuters reported, citing the company spokesperson.
The stoppage will spur an 8% cut in China’s monthly lithium carbonate output and "will help rebalance the supply with demand," UBS analysts led by Sky Han wrote in a note.
Lithium stocks have slumped this year as a supply glut overwhelmed demand from battery manufacturers amid slower electric vehicle sales.
However, lithium miners rallied on Wednesday after the EU signalled increased investment in Australian critical minerals, and as battery electric vehicle sales hit fresh highs in August.
What they said: "We expect investors, both inside and outside of China, to cover their shorts over the coming weeks on the back of recent supply curtailments, inventory drawdowns, and seasonal peak demand season," said Citi analysts.
"Today's news was positive but we will need to see more supply come out to solve our 2025 surplus; key will be how the broader China lepidolite supply story evolves," said UBS' Spry.
"We are still wary additional Africa supply growth following our recent visit and we remind that it is the seaborne spodumene price that will be crucial for marginal Australian producers," he said.
