Why not all ASX lithium shares are winners from surging commodity prices

Lithium prices are booming, but some miners are better placed than others to take advantage.

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Key points

  • ASX lithium shares are among the best performers on the ASX thanks to surging prices for their commodities
  • But not all lithium producers are well placed to ride on this wave and there are several reasons for this, according to UBS
  • The broker believes Allkem could be one that’s well placed to capitalise on surging spot prices

ASX lithium shares are among the hottest recent investment trends thanks to the looming supply deficit for the battery-making material.

But not all of these miners are set to be winners from surging prices for lithium, according to UBS.

This is despite the spot price for the commodity hitting record highs due to projected demand for electric vehicles (EVs) and green energy projects.

Upgraded lithium forecasts

A number of experts have warned that supply is not keeping up with demand, and even UBS has been forced to upgrade its lithium price forecasts.

“We revise our near-term lithium prices reflecting continued tightness in the market and with no signs yet of easing,” said the broker.

“We lift our 22E spodumene forecast approximately 17% to $4485/t…. Our [long-term] prices remain under review.”

Not all ASX lithium shares are built the same

The surging Liontown Resources Limited (ASX: LTR) share price, Allkem Ltd (ASX: AKE) share price, and Pilbara Minerals Ltd (ASX: PLS) share price may give investors the impression the rising lithium tide will lift all boats equally.

But the broker warned that not every ASX lithium share will necessarily benefit from price rises. This is because there is often a difference between the “spot price” and the “realised price” that a producer receives.

There are several reasons for the gap in the prices. The first is the composition of the ASX lithium miner’s order book. This means the proportion of sales done on a fixed-price agreement compared to those that reference the spot market, explained UBS.

Another factor is the significant discount applied to ASX lithium miners that produce brine versus technical grade carbonate.

A similar issue exists for lithium producers that sell spodumene below the industry’s SC6% benchmark. It’s worth noting that the discount applied to lower grade spodumene is not as great as brine.

Finally, there’s a timing issue. The reported sales by ASX lithium producers reflect realised prices from the previous period. The lag can exaggerate the differences between realised prices and spot prices.

The type of ASX lithium shares that do best in this market

But UBS believes the lithium market will evolve much like the iron ore market, where the industry gravitates closer to spot pricing.

“We draw analogies to the breakdown of the annual iron ore contract where market dynamics evolved to a point where the price difference between spot and contracted pricing made long-term fixed-price agreements untenable,” said UBS.

“There has been clear messaging by (some of) the producers to shift closer to pricing based off spot.”

From this perspective, Allkem may be better placed than others to benefit from rapidly rising spot prices. The miner recently changed its annual contracts that previously had fixed prices. It contracts now use indices to set realised prices with an average bimonthly adjustment.

Motley Fool contributor Brendon Lau owns Orocobre Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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