Stalling demand for electric vehicles isn't just hitting the automakers that sell them. It's also impacting companies along the supply chain including producers of lithium, the component used to make EV batteries.
Albemarle (ALB), the world's top lithium company, saw its stock tank as much as 7% on Monday after an analyst downgrade from UBS citing falling prices for the soft metal.
UBS analysts lowered their rating to Neutral from Buy and cut their share price target to $140 from $253.
"On UBS reduced EV forecasts, lithium demand growth declines from 30% Y/Y to 22% in 2024, and results in lithium over-supply sooner than expected," wrote analyst Joshua Spector and his team in a note to clients.
Albemarle recently cut its 2023 full-year guidance citing sliding lithium prices as demand in the US and Europe is expected to weaken.
“Our net sales were up 10% in the third quarter versus the same period last year. However, adjusted EBITDA was down due to softer lithium market pricing,” Kent Masters, CEO of Albemarle, said during the company’s latest earnings call.
"While the US and Europe make up only about one-third of total EV production in '23 and '24, near term we see potential challenges for EV growth in those regions related to economic softness and higher interest rates," added Masters.
Shares of lithium technology company Livent (LTHM) are also on a downward trend, down 24% year to date.
"On the demand side, we can see that customer buying activity for lithium in Q3 was weaker than what end market demand indicators would imply," Paul Graves, CEO of Livent, said during the company’s recent earnings call.
Unlike oil, gold, or any other major commodity, lithium is not actively traded on large international exchanges. The material is sold under contracts and the terms aren't generally publicized.
However China's spot market shows lithium prices are down around 50% from its June levels, recently moving below $20,000 per ton. The decline is a sharp contrast from a year ago, when prices for the critical metal coming out of China surpassed $70,000 per ton.
Albemarle says it has price floors on 80% of its contracts, which the company doesn't disclose. Those are intended to protect operations and help limit the downside of falling prices.
UBS analysts highlight "it isn't clear 1) where those floors kick in and 2) if they will hold in a prolonged downturn."
Lithium prices are falling at the same time US legacy automakers Ford (F) and GM (GM) and Tesla (TSLA) are warning of softening demand in the EV space as the cost of financing is more expensive.
In October GM said it would push back its EV truck expansion, noting “evolving EV demand” as the main reason. Ford also said that US EV buyers were “unwilling to pay premiums for [EVs] over gas or hybrid vehicles, sharply compressing EV prices and profitability.”
Even Tesla hit the pause button on construction of its upcoming Gigafactory in Mexico due to concerns about global economic conditions crimping demand.
“I’m worried about the high interest rate environment we’re in,” Musk said during the company’s latest earnings call. “I just can’t emphasize enough how important cost is … We have to make our products more affordable so people can buy [them].”
A revised outlook for the sector is prompting battery manufacturers to buy less lithium for their EV batteries.
Tesla supplier Panasonic recently cut automotive battery production in Japan and lowered its annual profit forecast.
Not everyone is so bearish on the market. Morningstar analyst Seth Goldstein downplayed worries about a lithium oversupply and said Albemarle's stock is undervalued.
"We think the market is concerned that lithium spot prices will fall further to the end of 2023 and into 2024 due to oversupply concerns," wrote Goldstein."We disagree and expect prices will rise in 2024 as battery producer inventory destocking runs its course."
"As demand grows, we see lithium returning to structural undersupply in 2024, leading to higher prices," he added.
Ines Ferre is a Senior Business Reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.
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