The Allkem Ltd (ASX: AKE) share price has sunk 40% over the past six months and it's down by over 20% in the past year. The ASX lithium share is suffering, but could the stock recover to $10 by Christmas?
Keep in mind, Christmas is only three weeks away, so investors shouldn't focus on what could happen in such a short amount of time. The long-term is what matters the most.
What's going wrong for Allkem shares?
Lithium miners are suffering from the significantly lower lithium price.
For example, in the quarterly update for the three months to September 2023 compared to the three months to June 2023, it said the Mt Cattlin project saw a decline in the realised price from US$4,297 per tonne to US$2,625 per tonne of spodumene concentrate.
For Olaroz, the third-party price of lithium carbonate received for the three months to September 2023 was US$25,981 per tonne, down 32% quarter over quarter from US$38,062 in the three months to June 2023.
A business can't make as much profit if the resource price is lower, as this largely cuts into net profit after tax (NPAT) – production costs are going to be the same, whether the lithium price is US$1,000 per tonne higher or lower.
Allkem is currently in the process of merging with Livent, and the Livent share price has also dropped heavily this year – it's down 42% in the past six months. A decline for Livent, in theory, should mean a similar decline for Allkem.
After the transaction combination has been completed, Allkem shareholders will own approximately 56% of the business, which is to be called Arcadium Lithium.
Could the ASX lithium share reach $10?
It's certainly possible, the market could surprise us both positively or negatively.
Getting back to $10 would represent a rise of over 15% for the Allkem share price, but that'd only take us back to a price seen in October 2023. Earlier this year it was trading above $16.
I'm not sure what would be the catalyst that would excite investors considering there is a lot of lithium supply coming online and Christmas is just around the corner. Forecasting wider (macro) economic events is not my ideal investment strategy, particularly for the short term.
I don't know what's going to happen, even for the longer term. Allkem's leadership is excited by the growth of electric vehicle sales, which is on course to increase around 35% year over year to around 14 million in the 2023 calendar year.
The ASX lithium share notes the adoption rate of electric vehicles is expected to increase at a compounding annual growth rate (CAGR) of 18% over the next decade, with lithium demand expected to increase 3.5 times by 2030. However, stronger demand doesn't guarantee higher lithium prices or growth of the Allkem share price.
Writing on The Bull, Jabin Hallihan from Morgans said:
We retain an add rating despite the short-term risks of softer lithium prices. Our share price target of $14.10 reflects AKE's growth potential. The shares were trading at $9.42 on November 9. We believe the company offers long term value despite challenges within the sector.