FY24 has been a tough year for S&P/ASX 200 Index (ASX: XJO) lithium shares. While it's good to be hopeful about the future when it comes to investing, some analysts are pessimistic about where the lithium price is headed next.
There are a few lithium stocks to monitor within the ASX 200, such as Pilbara Minerals Ltd (ASX: PLS), IGO Ltd (ASX: IGO), Arcadium Lithium CDI (ASX: LTM), Liontown Resources Ltd (ASX: LTR) and Mineral Resources Ltd (ASX: MIN).
Demand for lithium may increase over the longer term because of electric vehicles and other types of batteries, but rising supply is also having an effect.
Let's look at what one broker thinks is in store for the lithium price in FY25.
Rising inventory to hurt lithium prices?
According to reporting by the Australian Financial Review, the broker Citi thinks the lithium price could drop as much as 20% in the next few months because inventories are increasing at a "dramatic pace". Indeed, the broker is so pessimistic that it suggests investors short the commodity, according to the AFR.
Citi estimates that there is an oversupply in the physical market, with inventory increasing by around 70,000 tonnes since the start of 2024.
At the current lithium price, Citi suggested some mines could be closed and there could be some "industry rationalisation" which could eventually help with the "extremely large surpluses". The Citi global head of commodities of research, Max Layton, said:
This high and rising low-shelf-life chemical inventories should see lithium prices fall another 15 to 20 per cent to $US10,000 a tonne.
A low-price environment over the next three to six months would force supply curtailments, driving physical markets to rebalance.
Albemarle, the world's biggest lithium miner, said it wouldn't make new investments in lithium plants at the current lithium price. However, Albemarle is still optimistic about the long term because of the future demand, which is expected to come from electric vehicles.
Citi is "very bearish" on lithium and said that demand growth for lithium has halved in 2024 compared to 2023, putting the market in surplus by around 7% of total consumption, which isn't helpful for ASX 200 lithium shares.
The broker has decreased its expectations of shorter-term global electric vehicle sales due to higher interest rates, limited charging infrastructure, and limited product options.
Layton said:
Lithium consumption is expected to accelerate from 2025 onwards once the current negative EV sentiment fades.
Foolish takeaway
With that backdrop in mind, the outlook is clouded for ASX 200 lithium shares. FY25 could be tricky for the sector if the lithium price fell further. However, commodity prices are notoriously difficult to forecast, so it's possible that things could turn out better than what Citi is predicting. Time will tell whether Citi is right to be pessimistic.
