One of the best performing areas of the Australian share market in 2022 has been the lithium industry. Thanks to sky high lithium prices, a number of lithium shares have recorded exceptionally strong gains for investors.
For example, as you can see below, the Pilbara Minerals Ltd (ASX: PLS) share price has been a strong performer again in 2022 and is smashing the market.
But Pilbara Minerals isn't the best performer in the industry, not by a long shot. A number of other lithium shares have outperformed the lithium giant with significantly stronger gains over the same period.
One of those is the Core Lithium Ltd (ASX: CXO) share price, which has more than doubled in value in 2022 and is up 150% on a 12-month basis.
But will lithium prices remain strong for long enough to justify these impressive gains? Let's take a look at what Goldman Sachs is saying about the white metal.
Where are lithium prices going?
Unfortunately, the commodity team at Goldman Sachs is expecting lithium prices to start to soften from the second half of next year. This is due largely to its belief that supply will finally catch up with demand and put downward pressure on both prices and lithium stocks. It commented:
Battery expansion related restocking demand and higher EV sales kept the market tighter in 2H22 than previously expected. Our commodity team now expect lithium prices through 1H23 to reflect the near-term tightness and lagging spodumene contract price pass-through before declining over 2H23. While we see earnings support for the Australian stocks over 12-18 months on price lags, on a 12m view we expect lithium stock prices to fall as lithium prices decline from record peaks.
Ultimately, Goldman is forecasting global lithium demand to grow to ~1,300kt LCE by 2025, but expects lithium production to hit ~1,700kt LCE.
In light of the above, its analysts expect lithium to command the following (per tonne):
- Lithium carbonate
- 2022 US$59,331
- 2023 US$53,300
- 2024 US$11,000
- 2025 US$11,000
- Lithium hydroxide
- 2022 US$67,240
- 2023 US$58,015
- 2024 US$12,500
- 2025 US$12,500
- Spodumene 6%
- 2022 US$4,233
- 2023 US$4,330
- 2024 US$800
- 2025 US$800
If Goldman Sachs is on the money with its estimates, then it could be bad news for developer/explorers that aren't expected to be producing lithium for a couple of years. By the time their operations come on line, they could be dealing with wildly different lithium prices.
Therefore, it might be time to rethink the valuations of lithium shares such as AVZ Minerals Ltd (ASX: AVZ) and Vulcan Energy Resources Ltd (ASX: VUL).
