The market may be under appreciating the upside potential for ASX lithium shares. Is UBS estimating that battery supply will need to expand by more than 20 times in the next few years.
ASX lithium miners have been performing strongly as it is. But UBS' bullish view that is underpinned by its belief that electric vehicles (EVs) are switching to the fast lane could give the sector an extra boost.
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ASX lithium shares benefit from EV adoption upgrade
The analysts at UBS took a detailed look at Volkswagen's first affordable EV offering, the VW ID.3, which should arrive in Australian next year.
"We are more confident than ever in a steep EV penetration curve: 20% market share by 2025, 50% by 2030 (prev. 40%), with a chance of 100% by 2040 (prev. 80%)," said UBS.
"To reach 20% and 50% EV penetration in 2025 and 2030 respectively, we forecast battery cell supply needs to increase c22x to 4.5TWh (up 70% from our previous forecast) over the next decade.
"We also believe the average battery size per vehicle will now be 94kW-hr by 2030, up from our prior estimate of 73kW-hr."
ASX miners rock to lithium supply shock
The broker's growing confidence in the penetration rate is bolstered by the view that the cost of EVs will be on par with conventional ones by 2025.
"We don't think that the raw material supply-side is ready for the wave of demand that is coming should our EV outlook hold," concluded UBS.
While lithium, the key ingredient in batteries, isn't a rare commodity, miners aren't investing enough currently to meet future demand.
Why lithium may be heading higher over the next decade
If you added up all known projects up to 2030, regardless of their feasibility in this environment, UBS said the increase in lithium supply is only enough to satisfy a 22% EV penetration rate.
What this means is that lithium prices are likely to rise over the coming years. Higher prices are needed to incentivise miners to invest in exploration and mine and plant expansions.
Price upgrades support these ASX mining shares
"Accordingly, we have lifted our lithium price forecasts by >10% over the next five years while also upgrading our long term prices by 4-17%," explained UBS.
"[We] and now forecast US$11,000/t for lithium carbonate (prev. US$10,500/t) and US$700/t for spodumene (prev. US$600/t)."
The upgraded lithium price outlook is good news for ASX lithium shares. These include the Syrah Resources Ltd (ASX: SYR) share price, Galaxy Resources Limited (ASX: GXY) share price and Orocobre Limited (ASX: ORE) share price.
UBS is urging investors to buy all three ASX shares. It also rates the IGO Ltd (ASX: IGO) share price as a "buy" as nickel is another ingredient needed to produce batteries.
