Lithium has witnessed robust gains in the recent past, as bullish trends for electric carmakers have made investors park their money in lithium-focused investments. This is because electric cars are powered by lithium ion batteries and major carmakers across the world have been betting on the said commodity, in order to take advantage of the electric car revolution.
Per an Irish Times article, citing a statement by Milan Thakore, an analyst at Wood Mackenzie, “I think a lot of car manufacturers are almost panicking, in the sense they want to make sure they don’t miss out on the essential materials they need for the battery.” Per a Financial Times article, citing Goldman Sachs’ estimates, a Tesla Model S uses more lithium in its batteries than 10,000 smart phones combined.
However, the recent week did not start on a positive note for lithium bulls. Morgan Stanley had a role to play in bursting the bubble for people strongly bullish about lithium’s performance in the near future.
What Drove Lithium lower?
The Global X Lithium & Battery Tech ETF (LIT – Free Report) plunged 3.4% on Feb 26. This plunge was attributed to a Morgan Stanley report that stated that growth in demand for electric cars will not be enough to explain the growing supply of lithium from Chile. Moreover, the report cites analysts expecting lithium prices to fall by 45% by 2021.
According to the bank, new projects and expansion plans related to lithium in Chile might add 500,000 tons of the light metal per year to the global supply by 2025. “We expect these supply additions to swamp forecast demand growth,” the bank said. It expects 2018 to be the last year that’ll witness a demand-supply deficit, moving into a surplus equation 2019 onwards.
Morgan Stanley cited in its research note that it expects lithium prices to first fall to $7.332 a ton from its current price of $13.375 a ton. It then expects the price to sway toward its marginal cost of production of $7,030 a ton. The report stated that electric car sales will have to make up around 31% of total sales by 2025 to account for the expected oversupply, a lot above the less than 2% market share currently held by the segment.