Goldman calls the end of the battery metal bull market

Thanks to a massive surge in commodity prices, coal may be the most desired gift this year. But governments and car manufacturers prefer a different type of commodity — lithium.

Strong demand for battery metals

Prices of lithium — a key material in electric vehicle (EV) batteries — soared nearly 400% in the past year. The rise in EV demand has created a massive shortage, and new lithium projects were delayed or paused during COVID.

• Investments in downstream (i.e., processing, manufacturing) have far outpaced upstream (i.e., extraction) — leading to a bottleneck in one area of the supply chain.
• Global lithium extractors — Lithium Americas (NYSE:LAC) and Livent (NYSE:LTHM) are up 60% and 62%, respectively, in the past year.

Elon Musk called these levels “insane,” and carmakers have reacted to the rise in lithium prices by raising car prices. Tesla is even open to buying a mining company to secure supply.

The problem is more prominent in China — which makes 80% of the world’s lithium batteries. In March, China’s government met with market players to discuss bringing down lithium prices.

Warning of a reversal ahead

Commodities are highly cyclical — where prices are prone to booms and busts. With battery metal prices seeing record highs — where do prices go from here?

Goldman Sachs sees a sharp correction and an end to the bull run in battery metals — cobalt, lithium and nickel — expecting prices to fall over the next two years (BBG). GS expects:

• Lithium prices to fall over 60% to $16K per ton by 2023.
• Nickel prices to rise another 20% this year before falling.

While GS is bearish on near-term prices, they see strong long-term prospects that could set the market up for a “battery materials super cycle” in the second half of the decade.

This is good news for the EV industry — which has been dealing with rising material costs, labor issues and lockdowns affecting manufacturing.

Investors: Different opinions

But not all analysts share a bearish view. Citigroup doubled its lithium price forecasts, and Macquarie Group analysts think we could be in a “perpetual deficit” (BBG).

• Getting demand and supply right is difficult, so commodity prices tend to rise above or below their equilibrium price.
• Ramping up lithium projects can take up to a decade — and miners often ramp up production late due to shortages.

We’re in the early stages of a multi-decade-long EV transition, and if GS proves to be correct, investors may have better entry points ahead.