Mid-caps: Re-energised lithium price could power up ASX producers

Pendal has visited China to explore the state of the electric vehicle and battery metals markets. BRENTON SAUNDERS explains the latest

• China visit shows strong signs for lithium investors
• Find out about Pendal MidCaps Fund

A RECENT rebound in lithium prices should persist in coming months as an oversupply in key Chinese markets dissipates, says Pendal’s Brenton Saunders.

They could underpin good prospects for Australia’s lithium producers.

Pendal recently visited key players in the battery metals supply chain in China, finding evidence that overstocking was starting to end and supply and demand for lithium was coming back to balance.

The price of lithium — a key component in batteries for electric vehicles, mobile phones and laptops — peaked late last year before falling sharply in the first quarter.

But as this graph shows, the price of lithium carbonate (99.5% purity) has risen some 80 per cent this month:

Lithium Carbonate 99.5% China spot price

“The falling lithium price was largely due to quite a significant de-stocking in China, principally in the battery part of the lithium value chain,” says Saunders.

“That seems pretty close to clearing now.

“The clearing is driven by a step-up in demand for electric vehicles again, partly due to extended support from China’s government in terms of subsidies and incentives.”

Saunders says the result is a more balanced supply chain of batteries and battery precursor materials, which has allowed prices for lithium to start to rise again.

“We expected this to happen, but it’s possibly coming through a little bit earlier than then we had expected.”

Saunders manages Pendal MidCaps Fund which invests in the hundred biggest companies outside the ASX50, with market capitalisations ranging from $1 billion to $10 billion.

The lithium price has also been weighed down by concerns about the potential for new Chinese supply from the mineral lepidolite, an abundant but relatively inefficient alternative source of lithium that China has been seeking to develop.

“Our finding on the ground is that some of the alternative supply of lithium from China’s lepidolite deposits has been significantly deferred due to environmental constraints including permitting and disposal of waste and tailings.

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“That means the big Chinese procurers of lithium feedstock that had become increasingly reliant on domestic production are now going to have to go and find that material externally.

“That should underpin an already reasonably tight market.”

China is by far the world’s biggest electric vehicle market, forecast to produce 8.5 to 9 million electric vehicles this year, compared to 6.5 million last year.

“More importantly, an estimated 75 per cent of all the world’s EV batteries come out of China,” says Saunders.

“Even with most developed countries  trying to diversify EV supply chains, the reality is today they’re still very, very exposed to China.”

Outlook for Steel and iron ore

Pendal’s China visit also explored the outlook for steel and iron ore markets, which look set to come under further pressure in coming months.

“Residential real estate in China continues to battle and that is playing out in steel markets,” says Saunders.

“A lot of the private property developers are battling to fund new projects and declining house prices have hurt sentiment.

“It is not helped by the fact the government continues to stay away from stimulating property development because they want to de-emphasise speculation in property and make property more affordable.

“What that means for second half of this year is that steel and, by inference iron ore and other industrial metals, are likely to remain soggy.”

China is the biggest player in the global seaborne iron ore market, taking about three quarters of the world’s seaborne iron ore imports, and is also the world’s largest producer and consumer of steel.

“They drive the price action,” says Saunders.