ASX lithium shares have seen their fair share of pain over the last few months. However, while the short-term may be uncertain, there could be light at the end of the tunnel for the sector, according to one broker.
At the time of writing, the Pilbara Minerals Ltd (ASX: PLS) share price is down 26% since 10 August 2023, the Allkem Ltd (ASX: AKE) share price is down 23% and the IGO Ltd (ASX: IGO) share price is down 13%.
Those declines are quite sizeable considering the S&P/ASX 200 Index (ASX: XJO) is only down by 4.3% over the same time period.
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Positive long-term outlook for the lithium price
According to reporting by The Australian, the broker Citi believes the lithium price faces a risk of falling an additional 15% to 20% but that could then "set the market up for a strong rebound of the longer-term".
The broker has been bearish on the lithium price in the short-term since the middle of the year and is suggesting the lithium carbonate price could fall to $18,000 per tonne in China, while the CME hydroxide price could decline to $22,000 per tonne. This decline could happen over the next year.
Citi points out that lithium prices are susceptible to high levels of volatility. Strong growth of both supply and demand means that only small changes need to happen for the supply or demand growth, or stocking or destocking, can lead to "large swings" in balances. It was noted that lithium hydroxide is difficult to store for long periods of time. That can make it hard to clear, and this could affect ASX lithium shares.
Despite that uncertainty for the short term, Citi increased its long-term price forecast to a range of $20,000 to $25,000 per tonne after looking at incentive prices for new projects.
Citi's long-term forecast for lithium hydroxide is $23,000 per tonne in 2023 dollars, up from $17,500 per tonne. The China lithium carbonate forecast is now $20,000 per tonne, up from $15,000 per tonne.
Are ASX lithium shares buys?
Citi decided to upgrade its rating on Pilbara Minerals and IGO to a buy, though the IGO price target was reduced to $13.
Liontown Resources Ltd (ASX: LTR) shares are rated as neutral because of the ongoing Albemarle takeover attempt.
Mineral Resources Ltd (ASX: MIN) shares and Allkem are rated as a buy, though the Allkem share price target was reduced to $13.50.
Citi suggested that a surplus of lithium over the next few years, driven by volatile prices, means there could be deficits later in the 2020s and this could help ASX lithium shares.
The Australian quoted the Citi analyst Kate McCutcheon who said:
We may be too early on our buy call with consensus downgrades still to come for the September quarter onwards and battery restocking unlikely until post Chinese New Year but the names have pulled back about 30% over the past three months and on balance there's value here with producers on 0.7 times price to net asset value.
