Lithium bulls had a painful 2018 with investment banks citing multiple downgrades to the lithium spot price following fears of oversupply, Tesla's production/management related issues, and company-specific challenges.
The sentiment has been poor, with lithium giants such as the Galaxy Resources Limited (ASX: GXY) share price today hitting new 52-week lows at $1.94. The Orocobre Limited (ASX: ORE) share price and Pilbara Minerals Ltd (ASX: PLS) share price were also not far off lows.
Brokers also had similar opinions with changes to target prices below:
- 25 January, Citi cut Galaxy Resources target price by 7% to $4.00
- 25 January, UBS cut Galaxy Resources target price by 28% to $2.70
- 29 January, Bell Potter cut Galaxy Resources target price by 12% to $3.80
- 6 February, Morgan Stanley cut Orocobre target price by 10% to $3.80
What now?
Lithium prices have suffered heavy losses in 2018 as major miners boosted production and China experienced a slow-down in its new energy vehicle market.
The lithium market is expected to remain in a state of oversupply until at least 2022. With that being said, the demand fundamentals remain strong. A note out of S&P Global states that "global sales of passenger car electric vehicles (EVs) jumped by 63% last year to top 2 million units for the first time". In 2018, total EV sales rose to 2.2% of car sales.
I am still a believer in the lithium revolution, and confident that a time will come when demand matches supply. But the question we all wish we had the answer to, is when?
Foolish takeaway
The lithium spot price has shown little signs of recovery. This could continue to adversely impact the lithium miners' bottom line. Galaxy's recent report highlights a 30% quarter on quarter decline in its average cash margin.
While it might be compelling to buy a stock such as Galaxy or Orocobre when they look "cheap", being cheap does not substitute for "quality".
I would be patient in waiting for lithium market fundamentals to improve and for the stocks to find a proper bottom as opposed to continuous lower lows.
