The Allkem Ltd (ASX: AKE) share price is rising on Thursday.
In morning trade, the lithium miner's shares are up 1.5% to $14.79.
Image source: Getty Images
Why is the Allkem share price rising?
Today's gain by the Allkem share price may have been driven by a broker note out of Morgans.
According to the note, the broker has upgraded the company's shares to an add rating with an improved price target of $15.70.
Based on the current Allkem share price, this implies potential upside of 6.1% for investors from current levels.
What did the broker say?
Morgans notes that lithium shares sank this week "on news that some lithium carbonate futures contracts traded in China had fallen in price by 7%." It also highlights that some "Chinese battery producers have also reportedly reduced their inventories potentially indicating softening demand."
However, despite this, it points out that spot prices reported by AsianMetal fell by only a modest 0.5%.
In light of this, the broker appears to believe investors should block out the noise and focus on spot prices instead. It commented:
We think that spot prices are a better guide for AKE's contract reference price and we expect demand to remain strong for the next 12 months.
As a result, the broker believes it is too soon to "underweight the sector." It concludes:
We think it's quite possible that AKE's share price regains some of its lost ground if spot prices remain steady into the new year. We think the market has moved too early as it did in May when fears of oversupply circulated despite lithium pricing remaining robust. There will be a time to underweight the sector but we don't think that time has arrived yet. We upgrade our rating to ADD on valuation upside but we do note the sector remains highly volatile.
