Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
For months, shares of lithium producers like Sociedad Quimica y Minera (NYSE:SQM), FMC Corporation (NYSE:FMC), and Albemarle (NYSE:ALB) have been in a funk, hurt by investor worries that new supplies of lithium coming on the market would swamp rising demand for the metal to power electric car batteries. Since the turn of the new year, shares of Sociedad Quimica (SQM) have shed 14% of their value. FMC stock is down 16%. Albemarle has been hurt worst of all, with its stock off 28% in comparison to where it entered the year.
But maybe not for long.
This morning, analysts at Citigroup climbed out on a limb and declared that despite pessimism from pretty much everybody else on Wall Street, Citi believes that the lithium market is doing just fine, that Albemarle stock will do fine as well, and that you should buy it. Here's what you need to know about why.
Who's who in lithium?
Here's the problem in a nutshell. In a report last month, analysts at Vertical Research Partners laid out the "lithium landscape," identifying 30 key players in the global lithium market, and describing the factors that will determine their success or failure over the next few years. It probably won't surprise you to learn that the three companies named above are all among the globe's top four lithium "majors" identified by Vertical Research, with a combined target of producing 330,000 tons of lithium carbonate equivalent (LCE) annually by fiscal 2021.
Specifically, FMC is targeting production of 40 thousand tons of lithium per annum (KTPA). SQM aims to produce 125 KTPA. Albemarle, though, tops the heap with a target of 165 KTPA.
Now here's the problem. Currently, these three companies are producing a combined 140 KTPA, accounting for roughly 58% of the 243 KTPA of LCE produced globally in 2017 (and apologies for all the acronyms, but they prevent this article from growing longer than it needs to). To grow their production to 330 KTPA by 2021, Albemarle and its peers are planning to increase their production of lithium by 136%.
At the same time, however, Vertical Research estimates that the burgeoning market for electric cars, plus the markets for new cellphones, PCs, and other lithium-battery-powered devices, will all grow lithium demand by only about 71% by 2021. Thus we have a mismatch between supply growth and demand growth. Not to put too fine a point on it, but supply by the three lithium majors named above is growing twice as fast as demand, which is a recipe for falling prices -- and profits.
That would be bad enough, but once you factor in all the other companies either producing lithium today, or planning to begin mining and producing the metal in the near future, industrywide production of lithium is on pace to grow 184% through 2021, flooding the market with new lithium and swamping the pricing power of companies like FMC, SQM, and Albemarle.
Citi begs to differ
This, in a nutshell, is the nightmare scenario that's frightening investors away from lithium stocks this year. So why is Citi recommending that you buy Albemarle instead of selling it?
Citi simply doesn't buy the fatalistic scenario that Vertical Research (and others) have painted for the lithium industry.
In a write-up this morning on StreetInsider.com (subscription required), Citi argues that "we do not see a collapse in contract Li carbonate or hydroxide prices as predicted by the bears." Rather, Citi believes "a flat contract pricing scenario" is more likely -- and even there, the analyst doesn't think we'll see lithium prices flatten until "2019."
Among its other arguments, Citi notes that anticipated Chinese production of new deposits of spodumene, a pyroxene mineral containing lithium aluminum inosilicate -- and thus a source of lithium metal for batteries -- is encountering delays that will limit the growth of supply from China. (Hint: China's Sichuan Tianqi is the fourth member of Vertical's group of four major lithium producers, and other "Chinese" companies, taken as a whole, are No. 5 on the list.) Thus, Citi's view appears to be that delays in Chinese production coming on line will mute the effect of lithium oversupply, and prevent lithium prices from collapsing in the near term.
The upshot for investors
Does that really make sense, though? Sure, if Citi is right, then lithium supply may not grow 2.5 times as fast as lithium demand over the next three years -- but even if it grows only twice as fast, as represented by the production targets of SQM, FMC, and Albemarle, that would be bad enough. Such growth will surely pressure prices, and quite possibly force lithium prices down even if Citi is right.
And if Citi is wrong?
Look out below.