Brokers at Deutsche Bank and Morgan Stanley think that lithium supply could start to catch up with demand, following news from one of the sector's biggest producers, Chile-based SQM, that it had resolved a dispute with Chile over its production levels.
Following the resolution, Deutsche Bank was quoted in the Financial Times as expecting SQM to increase its production from 63,000 tonnes of lithium carbonate in 2019, to 163,000 tonnes by 2024. Both Morgan Stanley and Deutsche Bank were quoted in the article as forecasting increased risks to the global lithium price, with Deutsche stating that the market could begin to balance by late 2018.
This has implications for several Australian lithium miners such as Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE), for whom swings in the price of lithium can have a large impact on revenue and profits.
Other smaller miners – and miner wannabes – are even more sensitive as they are typically less well funded and have higher cost operations.
It's also important to consider the degree to which future supply can impact the market. While lithium is in the midst of a boom now, prices are high enough that many miners are hurriedly moving into lithium or working to expand their production.
Galaxy and Orocobre have a number of side projects that could bring extra supply onto the market over the next few years, and as FT reported, global miners are also looking to increase their output.
A booming minerals market can also hide shocking capital allocation decisions, as is evidenced by the write-offs taken by some of our major iron ore miners recently. One key risk I see with lithium is not that supply increases and prices fall (though that is a key risk), it's that the miners spend big on marginal expansions or poor acquisitions.
If you're going to be a long-term owner of lithium miners, their capital allocation decisions are going to prove at least as important as the growth in electric vehicles demand, even though people focus on the latter and basically ignore the former.
