Lithium in freefall, remain bearish near-term –Citi

Quite often when I post the details of a broker note in social media, I’m met with the usual “Well what would they know, they’re always wrong anyway!”. Well doubters, here’s proof that the major brokers do get it right – and to be fair – this time Citi has nailed it.

I have to give extra credit to Citi, because in my experience it’s quite rare to see such a specific call on a commodity followed by pinpointing exactly which futures contract to trade. Spot on.

A quick background check on Citi’s current lithium short trade:

1. In April, major broker Citi said the fundamentals for lithium had become “detached from reality” and recommended clients take out a short positions in August futures

2. In May, they doubled down, increasing the size of their bearish bets by adding a short position in December futures

And yesterday, Citi updated clients on the trade (now showing massive profits after lithium’s recent price plunge), choosing to hold on to both short positions for further downside in lithium prices.

“Lithium prices should fall another 15-20%”

This is the message for clients holding shorts in the specified lithium futures contracts (i.e., lithium hydroxide futures traded on the CME). Citi notes that inventories of lithium hydroxide and other lithium chemicals in China continue to rise and this is driving a large surplus.

Figure 10. Inventories of lithium chemicals in China remains elevated driving large lithium surplus. Source: Citi Research, SMM. (From: “Metal Matters: Lithium in freefall, visible inventories rising at a dramatic pace, remaining very bearish near term”, Citi Research, 25 June 2024)

Inventories have increased by around 70kt, suggests Citi, and “high and rising low-shelf-life chemical inventories should see lithium prices fall another 15-20% to $10k/t on GFEX”. GFEX is the Chinese-based futures exchange where key lithium carbonate futures are traded, so the 15-20% further to go call is based on Citi’s target for lithium carbonate futures.

It can get a little confusing here, because we started talking about lithium hydroxide and now we’re talking about lithium carbonate. FYI, the GFEX lithium carbonate contract is widely considered the most transparent regular touchpoint for daily lithium prices. (That statement will spark controversy among my X/Twitter followers – but it is!).

Other lithium chemicals/minerals like lithium hydroxide and spodumene are often referred to in lithium carbonate equivalent (LCE) terms – in this way you can think of lithium carbonate as the lowest common denominator in the lithium-battery supply chain.

The lithium carbonate price tends to have a significant impact on broader lithium market pricing, and love or hate them, GFEX lithium carbonate futures are rapidly becoming a key lithium market pricing touchpoint.

The reason why Citi has gone for a futures trade in CME lithium hydroxide is likely to do with the fact that most of their clients have better access to the US futures exchange rather than the Chinese one (and CME only offers lithium hydroxide futures).

Either way, Citi says: Hold those shorts! They’re up 19% and 14% respectively in just a couple of months and Citi sees “further room for the trades to run in the near-term”. There are several reasons for their continued near-term bearish thesis:

Demand side:

• “Inflation, high interest rates, range anxiety, lack of charging infrastructure and limited product optionality has tempered global EV sales expectations” (Citi’s Global Autos team have downgraded their EV adoption forecasts twice in the last 6-9 months)

• “Growing LFP penetration and weak NMC cell demand is likely to push hydroxide prices lower”

Supply side:

• “Lower prices have slowed supply growth from 40% in 2023 to 18% in 2024 but we think needs to slow further… A persistent lower pricing than current is needed to force mine/converter shutdowns”

• “China domestic production of lithium chemicals remains robust”

Figure 4. Lepidolite-based lithium carbonate production up 34% y/y ytd. Source: Citi Research, SMM. (From: “Metal Matters: Lithium in freefall, visible inventories rising at a dramatic pace, remaining very bearish near term”, Citi Research, 25 June 2024)

Technical / market arbitrage:

• “Domestic China hydroxide prices are at $10k/t and we expect the gap between China domestic and CME hydroxide to reduce further”

Still medium term bulls, though…

That’s the bad news lithium bulls. Now for the good news!

The whole time Citi has championed their existing short trade, they’ve remained committed to their call that once the short term supply issues are worked through, there should be higher lithium prices on the other side. “Prices around these levels are expected to eventually lead to mine/converter closures and industry rationalization, alleviating our modelled extremely large surpluses”, they note.

Crucially, the other part of the pricing equation – demand – is also expected to improve. Citi expects that once the current negative EV sentiment fades, lithium consumption “will accelerate from 2025 onwards”.

Citi believes new battery technologies like the Shenxing PLUS lithium iron phosphate (LFP) battery (that claims a 1,000 km range), and range-extended electric vehicle (EREV) platforms (that use generators to recharge the battery) will help reduce range anxiety and promote greater EV take up.

“We see scope for prices to rebound to $18-20k/t by 2025 once the physical market rebalances”, says Citi. This means prices could eventually rise as much as 67% from their current level, and roughly double Citi’s ultimate short trade target.

One thing seems for sure if Citi's views prove to be correct – we are about to see some potentially bear-then-bull market defining moves in lithium over the next 12 months.