What Do Experts Think About Goldman Sachs' Lithium Oversupply Call?

Goldman Sachs report misses market fundamentals

Following the report's release, lithium analysts and experts shared their concerns over a call that they say ignores the fundamentals of the battery metals market.

Commenting on the predictions from Goldman Sachs, Rodney Hooper of RK Equity told the Investing News Network (INN) he strongly disagrees with the analysts' findings on both supply and demand.

“My biggest issue with the report is that it will discourage upstream investment in mining,” he said. “We clearly haven't seen sufficient upstream investment to meet current and future demand.”

Also speaking with INN, Daniel Jimenez of iLi Markets agreed, saying that analysts at the investment bank are overestimating supply and underestimating demand — Goldman Sachs analysts are expecting global demand of around 1.2 million MT of lithium carbonate equivalent (LCE) by 2025.

“We think that lithium producers have better industry insights and truthful talks with most of the original equipment manufacturers (OEMs) they supply,” Jimenez said. Top lithium producer Albemarle (NYSE:ALB) is calling for around 1.5 million MT LCE, while Chinese giant Ganfeng Lithium (OTC Pink:GNENF,SZSE:002460) is expecting around 1.6 million MT during the same period.

“On the supply side they are extremely optimistic in terms of the lepidolite production that could come from China in the coming years, which is also not realistic,” Jimenez said. “Bottom line — we believe it will be just the contrary.”

Similarly, analysts at Benchmark Mineral Intelligence said the industry cannot rely on China’s feedstock to meet the needs of the market.

“Known domestic Chinese spodumene and other hard-rock resources are low quality, a key reason why there has been an increasing reliance by Chinese converters on Australia for supply instead,” analysts at the firm said in a note released soon after the comments from Goldman Sachs. “China’s deposits of lepidolite may have the potential to help bridge the deficit in coming years, but are unlikely to lead to oversupply.”

Lithium market forecasting not an easy task

Goldman Sachs is not the first big bank to have its analysis called out by experts in the lithium field. Back in early 2018, when prices for the commodity had been on the rise for a couple of years, Morgan Stanley (NYSE:MS) predicted a decline by 2021, with escalating fears of oversupply in the market.

“We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the lithium mine level potential and make an oversupply call ... the speciality chemicals world is more nuanced than iron ore,” Benchmark Mineral Intelligence’s Simon Moores said in a tweet when the Goldman Sachs report came out. “It’s why the world doesn’t rely on investment banks for research any more.”

Predicting how the lithium market will perform in coming years is not an easy task. As a specialty chemical, not all lithium is created equal, and not all auto and battery makers have the same needs. There are countless constraints to bringing supply into the market, and as analysts often point out, delays are common for new projects, as well as for producers that are expanding their existing operations.

Hooper said some analysts tend to get both demand and supply wrong. “The best indicator of battery-grade demand is cathode production,” he said. “Historical analysis shows that demand linked to cathode production has the highest correlation to lithium prices — this indicator flagged a demand/supply deficit in late 2020.”

When assessing the supply side of the equation for lithium, Hooper does not consider projects until they are fully permitted, financed and under construction. And even then, he allows for a long ramp-up phase and qualification timeline, especially if he's looking at a greenfield project.

“What happens when you use these indicators is that cathode production brings demand forward six months, and supply adjustments push qualified material out six to 12 months,” he explained. “The net result is a structural deficit as analyst forecasts of the supply/demand balance in the market are out by 12 to 18 months.”

In a market like copper, that could mean a few percentage points worth of total demand, Hooper added, but in a market such as lithium the difference is “enormous.”

Commenting on the biggest challenge for analysts in determining what will happen in lithium, Jimenez, who before iLi Markets worked at top lithium-producing company SQM (NYSE:SQM), said it's clear there are excesses in terms of predicted capacity increases and production ramp-up times.

“Feasibility reports are, based on past experience, very optimistic,” he said. “Furthermore, the confidence that new technologies or resource types will be able to deliver are overly optimistic. In many cases, we are talking of unproven technologies that have not been scaled from lab to industrial yet.”

Lithium prices expected to remain at steady levels

The lithium price rally has made news headlines around the world since 2021, with Evy Hambro of BlackRock (NYSE:BLK), the world's largest asset manager, talking about the essential need for lithium into the future as part of the group of metals needed for the green energy transition.

Lithium pricing is usually a common concern for investors new to the space, with experts generally reminding anyone interested in the battery metal that there’s no single lithium price. Lithium traded at spot prices only reflects a portion of the market; most is locked up in contracts, which in some cases include fixed pricing.

Combined with existing contracting arrangements set in 2022, prices are very unlikely to crash in 2023 and 2024, according to Benchmark Mineral Intelligence.

“Benchmark’s view is that contract prices are likely to continue to rise as a lagged effect of the major step-change in spot pricing over late 2021 and 2022 while spot prices will fall, with the two prices coming into more of an equilibrium than they are now,” analysts at the firm said.

Structurally, prices will remain high through 2025 to 2026, at least, iLi Markets' Jimenez said. “Now high means above US$40 per kilogram, which is significantly higher than the incentive price to develop a marginal-cost greenfield project,” he said. Whether the price will be U$40, U$60, U$80 or U$120 is a difficult call to make.

For the expert, each year the industry will need to grow supply by more than 200,000 MT of LCE per year, which was the total demand seen in 2017. “The possibility that greenfield projects suffer delays is high,” Jimenez said. “Probably lithium units will be the bottleneck of the lithium-ion battery supply chain.”

China’s measures to contain COVID-19 have recently hit EV sales, and as a result the need for lithium, although this pullback in lithium demand is seen as temporary. “When EV demand resumes in H2 2022, as China lifts restrictions, I expect spot and contract pricing to remain firm,” Hooper said.

Even for Wood Mackenzie analyst Allan Pedersen, who sees lithium prices declining by the end of 2022, a “sharp correction” like the one expected by Goldman Sachs is not coming. “We do not forecast a sharp correction, but more a 'softer landing' as demand remains strong, providing a cushion for prices,” he told INN.

The research firm is expecting additional supply to enter the market both from brine and mineral concentrates; this will increase supply beyond demand in the short term.

“It is worth noting the surplus is fragile and small changes in EV forecasts can have a significant impact on the demand for lithium, and therefore on the market balance,” he said. “We forecast that the supply surplus for battery-grade lithium chemicals will be less than the market in general, as producing high-quality, battery-grade lithium chemicals is difficult.”

Growth in the lithium industry is happening at a rapid pace, with changing market dynamics expected to emerge.

“As the market wrestles between long-term supply security to fuel the lithium-ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning,” analysts at Benchmark Mineral Intelligence said.