Why ASX lithium shares are beating the iron ore majors – again

The fortunes of ASX iron ore shares and lithium miners continue to diverge. Here’s why…

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ASX lithium shares A stylised clean energy battery flexes its muscles, indicating a strong lift in share price for ASX energy companies

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The mining sector is dragging on the market this morning – but that’s not the case for ASX lithium shares which are trading higher.

The underperformance of the sector is primarily due to the fall the big ASX mining shares, which are all exposed to iron ore.

The Fortescue Metals Group Limited (ASX: FMG) share price dropped 2% to $23.91, the BHP Group Ltd (ASX: BHP) share price shed 1.6% to $52.85 and the Rio Tinto Limited (ASX: RIO) share price surrendered 1.2% to $131.62 at the time of writing.

Our largest miners were the main drags on the S&P/ASX 200 Index (Index:^AXJO) as it dipped 0.2%.

ASX lithium shares bucking the downtrend

However, the smaller ASX lithium shares are bucking the trend. The Galaxy Resources Limited (ASX: GXY) share price rallied 3.2% to $4.84 and Pilbara Minerals Ltd (ASX: PLS) share price added 2.1% to $1.95.

This rotation has been playing out in recent days and could continue for a little while yet.

This is because the outlook for both commodities have started to diverge – and quite rapidly.

Iron ore could fall deeper into bear market

The price of iron ore has fallen into a bear market and Morgan Stanley believes the steel making mineral has passed its peak.

“The iron ore price is falling, down to $181/t from a high of $222/t in early July, pulled down by rapidly slowing Chinese demand,” said the broker.

“We see further downside price pressure, as we expect the incremental market tightness that pushed iron ore through the $200/t barrier during 1H to fully unwind in 2H21.”

Morgan Stanley is forecasting the average price for the ore will tumble to US$160 a tonne by the 2021 December quarter. More worryingly, it warned that even that estimate may prove to be too optimistic.

Brighter outlook for ASX lithium shares

Meanwhile, the outlook for lithium continues to power up. Macquarie Group Ltd (ASX: MQG) noted that spodumene spot prices have surged to over US$1000 a tonne.

“Global passenger electric vehicle sales rose 153% YoY in June to 540k vehicles and 161% YoY in the first half to 2.4m vehicles,” said the broker.

“Macquarie’s Commodities Strategy Team believed that full-year 2021 sales should be well above 5mt and upgraded their forecast from 4.8m to 5.3m vehicles.

“An expected end-year surge in sales in Europe and China could take the final figure even higher.”

ASX shares to buy

In this context, Rio Tinto Limited’s (ASX: RIO) move to expand aggressively into lithium looked well timed. But it will be 2026 before its Jadar project will hit first production.

Macquarie’s top buys in the sector are the Mineral Resources Limited (ASX: MIN) share price, IGO Ltd (ASX: IGO) share price and Pilbara Minerals share price.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Fortescue Metals Group Limited, Galaxy Resources Limited, Macquarie Group Limited, and Rio Tinto Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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