Citi now “doubly bearish” on lithium

At the time of writing, the August lithium hydroxide futures contract is trading around US$15,450/t delivering those who followed Citi’s recommendation a 7.5% gain in one month. Remember, hedge funds often work in annualised returns when considering trades of a short term nature – so that’s around a 90% return on an annualised basis.

Today I bring you news they’re not taking profit on the trade yet, and worse still for lithium bulls, they’re doubling down on their short bet by recommending traders also short the December lithium hydroxide contract.

1. “A reset in global EV sales expectations (particularly in the US and Europe)…In addition to this, the strength in Chinese EV demand is not necessarily translating into lithium price gains”
2. “We see the lithium market in a large surplus (~6% of total supply) this year and next. Supply cuts have been limited this year to date and most of the greenfield/brownfield expansions continue to progress increasing volumes.”

Fundamentals “remain weak”, lower prices required

On the second point, Citi argues the cure for lower lithium minerals prices is ultimately – lower prices. They suggest that at current spot prices, there’s little incentive for miners and converters to cut volumes. Only lower prices can force curtailment, and therefore rebalance the market – “A lower-price environment (sub-US$12,000/t) over the next 6-9 months should be sufficient in our view to drive the market to rebalance”, notes Citi.

Let’s contango!

The December contract is currently trading at US$15,900/t, an 11% premium to the spot month’s contract at US$14,290t. When you add in Citi’s spot prices forecast of US $11,000/t over the next six months, the broker suggests the total expected return on the trade could be as much as US$5,000/t, or around 31%.

Short term bear, long term bull

Citi cites the fact China EV sales “remain strong”, but also that the mix is changing with more plug-in variants (PHEVs) being sold than fully electric versions (BEVs). PHEV’s require a smaller battery, and therefore use a smaller amount of lithium per vehicle.

It’s just a matter of time…

In keeping with Citi’s lower prices is the cure for lower prices thesis, I’ll leave you with this last quote from their research report:

The industry needs constant investments in mine supply to ensure that the requirements of the energy transition are met. In the event lithium continues to trade at current prices for next 6-12 months, future project supply, especially of junior miners, will inevitably face funding issues as these projects may not be viable at current prices. Most of these projects are expected to bring volumes into the latter part of the decade and failure to achieve financing milestones could eventually impact lithium supply.

This article first appeared on Market Index on Wednesday 22 May 2024.