Lithium Price Disconnect: Why the Mainstream Has Got It Wrong

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It was another rough day of trading for commodities on Thursday. But of all the sectors hit, lithium stocks once again bore the brunt of the sell-off.

Clearly the pessimistic narrative is still prevailing…

But as I explained yesterday, the overall outlook doesn’t align with this dim view. The long-term demand for lithium and many other battery metals simply isn’t going away.

In fact, the outlook for combustion engine vehicles is what investors should really be worried about.

How that will pan out, and what it means for automakers, though, is unknown. After all, electric cars are easily the biggest disruption the automotive industry has had to face in a long time.

But I’ve already spoken at length about this narrative.

Instead, today, let’s focus on the other big factor: price.

Because at the end of the day, opinions on demand aside, price is always going to be the leading indicator. And when it comes to lithium, that price isn’t budging…

Share prices may fall, but lithium is rocksteady

Like most commodities, the price of lithium fluctuates on monthly spot and futures contracts. If buyers are buying the price goes up, and if they’re not the price goes down.

For the most part, it’s just that simple.

Where things get complicated is when we start adding forecasting into the mix. After all — like any investable industry — you can analyse, evaluate, and predict how much product buyers may be buying.

This is exactly what the recent Goldman Sachs report covered — the report that set off this recent lithium exodus…

As I stated yesterday, I think they’ve got it wrong. And more importantly, I’m not the only one.

Matt Fernley of Battery Materials Review shows us exactly why Goldman is wrong. Just take a look at the following chart and you’ll see:


Fat Tail Investment Research

Source: Battery Materials Review

[Click to open in a new window]

In Matt’s own words:

The adjacent [above] chart shows sell-side consensus for lithium hydroxide vs futures prices.

I don’t think I’ve ever seen a bigger gap for a material between what the industry is factoring in and what the equity market is.

There’s something that equity analysts are really not getting, and it’s very much emphasised by recent reports from bulge bracket banks. I’m sure readers know which reports I’m referring to!

I don’t want to bag any analysts, but the fact that these reports are written by generalists with little experience in the sector comes out very clearly.

In other words, Goldman has no idea what it’s talking about.

The company is simply taking a punt on a sector that looks as though it’s in a bubble. The trouble is, sometimes what may look like a bubble can actually turn out to be a bigger boom.

The opportunity in price disconnects

If you want further proof that the market is detached from the lithium reality, just look at Pilbara Minerals [ASX:PLS].

The company finished yesterday’s session flat after an initial surge at the open. That short-lived surge was due to a pretty important ASX update. According to management, Pilbara had found a buyer willing to pay US$7,017 per tonne for its spodumene concentrate (lithium).

That’s roughly a $500 increase from Pilbara’s last auction a month ago, proving the point that demand and prices are still going up.

As Pilbara’s CEO, Dale Henderson, made sure to note:

Contrary to recent suggestions that the market has peaked, the evidence we are seeing at the coal-face with our customers, including this pricing outcome, suggests that demand remains incredibly strong, with a continued healthy outlook for the foreseeable future.

No matter how you look at it, the details just don’t add up.

Lithium is still booming even as investors flee in droves. Perhaps they’re just worried about the overall economic backdrop, something that’s certainly a lot less rosy.

If you’ve got the capital to spare, and are willing to take on the risks, then lithium should be on your radar. There’s some serious opportunity in taking advantage of this price disconnect right now.

In fact, my colleague Callum Newman can tell you all about it. And you can expect to hear plenty more from him about this battery metal boom in the coming days.

Trust me when I say you won’t want to let this chance pass you by…

Regards,

Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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