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Supply-Demand Balance in Lithium Forces Changes to BofA Ratings

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From a mid-November high of around $87,000 per metric ton, the price of lithium carbonate in China had dropped to about $33,000 by last Friday. Why China? It is the world’s third-largest producer, the second-largest exporter and the largest importer of lithium carbonate.

China’s (and the world’s) largest producer of lithium batteries, CATL, announced in February that beginning in the third quarter of this year, it would drop the price of lithium to around $30,000 per metric ton. That led to buyers letting their stockpiles of lithium decline. As demand fell, so did prices. Restocking will need to occur, but that may not happen until the fourth quarter.

On top of this, the U.S. Inflation Reduction Act (IRA) offers subsidies for electric vehicle (EV) buyers if they use lithium produced in North America or other free-trade countries, like the world’s largest and second-largest producers, Australia and Chile. Those supplies, however, are derived from spodumene and need to be refined to produce battery-grade lithium carbonate. That takes capital, and, according to a research note published last week by Bank of America Securities, the investment may need to be doubled in order to produce both IRA- and non-IRA-compatible lithium carbonate.

In a second research note published Wednesday, the analysts say the downside risks are rising for Albemarle Corp. (NYSE: ALB). Analyst Matthew DeYoe and his team at BofA have cut their earnings forecast for Albemarle “considerably” due to the falling prices. The analysts note that the company could face a headwind of more than $800 million to EBITDA if lithium carbonate prices remain near $30,000.

For Albemarle and Livent Corp. (NYSE: LTHM), “non-China markets drive much of their profitability,” and, lacking a “substantial” rally in spot prices, the analysts expect broader global markets to contract “until parity is reached.” New mines coming into production threatens to make that rally unsustainable, however, not just in the near term but in the medium term as well.

Given all that, BofA has cut its price objective on Albemarle from $262 to $195, more than 25%, and dropped its rating on the stock from Neutral to Underperform.

BofA also lowered its price objective on Livent from $29 to $27 but upgraded the stock from Neutral to Buy. Unlike Albermarle, and other of its “aggressive peers,” Livent follows a more conservative pricing strategy that yields “more modest earnings growth,” but also may react more modestly to falling prices.

A third producer, Sigma Lithium Corp. (NASDAQ: SGML), has begun operations at its Grota do Cirilo Project in Brazil and is to complete its first production run this month, ramping to commercial production of 270,000 metric tons of battery-grade lithium annually in the second half of this year. Sigma also has begun detailed engineering and cost planning that would take production to 766,000 metric tons per year.

The BofA analysts have raised their price objective on Sigma by $1 to $46 and reiterated their Buy rating on the stock.

In mid-morning trading today, Albemarle traded down 7.14% at $194.50 in a 52-week range of $185.15 to $334.55.

Livent shares traded down 3.93% at $19.81 in a 52-week range of $18.26 to $36.38, and Sigma Lithium traded down 5.8% at $35.20 in a 52-week range of $12.71 to $40.30.

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