Lithium bulls getting ahead of themselves on China supply cut

Mint

a day ago

The suspension of a big mine in China may be breathing new life into a depressed global lithium market, but the accompanying rally in shares of lithium producers has run too hard, too fast, analysts say.
Lithium stocks began the week with a bang, chasing prices for the battery metal higher after China's Contemporary Amperex Technology, or CATL, said its license for a mine in Jiangxi province had expired and that production there had been suspended.
Shares in some lithium producers climbed by more than 20% on Monday, as investors bet that Chinese supply cuts could extend beyond the CATL mine closure. Beijing is generally seeking to curb excess industrial capacity, an issue that has fueled hyper-competition and worsened deflationary pressures.
Yet there remains a lot the market doesn't know about how future lithium output may be affected in China, analysts say. 'The actual supply disruption could be more muted than equities might suggest," UBS analysts said in a research note.
CATL said it would resume production at the site in Jiangxi if its license is renewed. More broadly, the lithium market remains reasonably well supplied, analysts said.
Already, some stock investors are cashing in on Monday's rally. Australian producer Pilbara Minerals fell by nearly 1% Tuesday, giving up a little of its 20% gain the day prior. Another miner, Liontown Resources, dropped by 8% following an 18% gain a day earlier.
To be sure, a reduction in Chinese lithium supply could mark a turning point in a market that has been weighed by a global glut. Prices for lithium have fallen by as much as 90% since notching a record high in 2022, a rally that sparked a wave of new lithium investments and led to the current oversupply.
The UBS analysts have raised their forecasts for lithium prices on expectations of supply disruptions in China. There appears to be a recovery on the horizon, they said.
Still, stock prices have moved too quickly in response, said the analysts.
Others agree. The rally is underpinned by bullish sentiment about China's campaign against unhealthy competition, rather than industry supply and demand fundamentals, Macquarie analysts said in a note.
'If the production suspension expectations are not met, sentiment could quickly reverse," and 'a market repricing demand and supply again could result [in a] correction in lithium equity names," they said.