Lithium Stocks Keep Climbing: Decoding the Divergent Trends in Mining Equities
The mining sector has recently displayed a divergence in performance, with lithium stocks, spearheaded by $Pilbara Minerals Ltd(PLS.AU$, gaining momentum. Since last Wednesday, Pilbara shares have surged by 18%, hitting their highest level since October of last year. In contrast, iron ore giants such as $Fortescue Ltd(FMG.AU$, $BHP Group Ltd(BHP.AU$, and $Rio Tinto Ltd(RIO.AU$ have experienced a slump, with their share prices on a downward trajectory. Despite both lithium and iron ore being highly dependent on Chinese market demand, why are their capital market trajectories so starkly different?
Supply Halts Drive Up Lithium Carbonate Prices
Lithium mining stocks have been riding a continuous wave of growth, thanks largely to the climbing in Chinese lithium carbonate futures prices, with the fundamental cause tied to ongoing supply-side disruptions. Since last Wednesday, the dominant lithium carbonate contract has been on a steady incline, hitting 119,200 CNY/mt—a notable 28% increase—with today alone witnessing a 9% surge.
As one of the key regions for global lithium resource supply, Yichun in China, often referred to as "Lithium Capital ofAsia", has been facing stringent environmental policies. Local authorities have mandated lithium processing enterprises to self-inspect their environmental compliance and enforce strict tracking of the disposal routes for refining slag. These measures have led to temporary halts in the transportation activities of some companies, causing disruptions in lithium supply. Morgan Stanley wrote in an overnight report,
Overall, we think the current supply disruptions and concerns will lift near-term market sentiment as lithium output in Yichun accounted for around 20% of China's total lithium production and approximately 13% of global supply in 2023.
Meanwhile, production forecasts for Australian lithium mines are also showing signs of contraction. Mt Cattlin, one of Australia's key lithium mines, is expected to account for 7% of the country's primary lithium production in 2023. On February 23rd, according to a financial report by $Arcadium Lithium PLC(LTM.AU$, due to cost pressures, the projected production of spodumene concentrate for 2024 is set to be significantly reduced by 36.6% to 130,000 tons, which equates to a decrease of approximately 9,500 tons of LCE(lithium carbonate equivalent).
In addition, $Core Lithium Ltd(CXO.AU$ announced a postponement of its BP33 project and a pause in open-pit mining activities, while the Greenbushes lithium mine has lowered its production forecast for lithium concentrate in 2024.
Iron Ore Demand Falls Short of Expectations
Iron ore prices this year have been fluctuating within the range of $120 to $140 per ton, with no clear upward momentum. This is primarily due to the slow recovery of China's real estate sector. The total investment in real estate has declined for two consecutive years, with the total investment amount in 2023 decreasing by 9.6% year over year.
Due to the downturn in the real estate industry, Chinese steel mills have experienced squeezed profit margins, leading to losses in some cases. As a result, many steel mills have postponed their plans to resume production, and there have been instances of some steel mills idling their blast furnaces.
After the Lunar Chinese New Year, the majority of Chinese steel manufacturers have opted to first monitor prices rather than immediately replenish their inventories. Consequently, iron ore portside inventories have been accumulating for 11 consecutive months. A manager at a steel mill in north China said,
This year might be even harder than last year in terms of garnering profit. We will continue to maintain a low inventory of raw materials.
What Are Analysts' Opinions?
Although recent disruptions in supply have given the market a lift, Morgan Stanley's assessment holds that the base case for lithium carbonate is pegged at US$13,500/t (approximately CNY ¥97,065/t), marking a slight 5.5% premium over current spot prices. The projected price increase is relatively conservative, which is primarily due to a slowdown in sales growth within the domestic EV market, alongside a significant pricing pressure.
Regarding iron ore, Aude Marjolin, an analyst at S&P Global Market Intelligence, anticipates that the prices in 2024 will stay at similar levels to 2023. He contends that the iron ore market sentiment is in lockstep with views of China's economic outlook.
Source: Macromicro, Market Index, iFind, Morgan Stanley
By Moomoo News Marina
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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