Lithium prices have rebounded recently after a long period of decline, and Macquarie has selected four locally-listed producers as its top picks in the sector.
Prices for the critical battery mineral fell 17% over the first six months of the year and indeed had suffered "an almost uninterrupted 24-month slide since mid-calendar year 2023", Macquarie said.
But there are now some green shoots.
"We are observing signposts that could indicate the beginning of another lithium cycle, driven by a growing mismatch between supply and demand,'' Macquarie analysts said.
They also said they believed the market's reaction to the sooner-than-expected restart of major Chinese mine CATL Jianxiawo "may have been overdone".
In addition, we also note several near-term supply challenges in the lithium market, including resource audits for the remaining seven lepidolite mines in Jiangxi, civil unrest and ongoing political tensions in Mali and permitting challenges in Brazil. In the near term, EV (electric vehicle) penetration rates remain strong at 12% in the US, 55% in China, and 31% in Europe as of August.
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Local stocks in favour
In terms of Australian lithium producers, Macquarie analysts have an outperform rating on IGO Ltd (ASX: IGO), Pilbara Minerals Ltd (ASX: PLS), Sayona Mining Ltd (ASX: SYA), and PMET Resources (ASX: PMT).
Macquarie has increased its price target for IGO from $5 to $5.50, compared with the current price of $4.91.
The price target for Pilbara Minerals has been upped from $2.20 to $2.30, equal to the current share price.
For Sayona Mining, Macquarie's price target has been lowered from $6 to $5.50, compared with $3.29 currently.
The price target for PMET Resources has been increased from 36 cents to 50 cents, compared with 46.5 cents currently.
Lithium demand to remain strong
Macquarie analysts say in their note to clients that commodity prices are the main risk factor for most of these miners, but they also argue that medium-term demand forces are underappreciated.
They say two factors are not being fully priced in by the market, with BESS (battery energy storage systems) and heavy haul truck demand not being adequately accounted for.
If battery energy storage systems continue their current growth trajectory, lithium consumption could rise substantially, establishing a higher demand base for CY26 and beyond. We believe that the market consensus may not yet fully account for the potential upside in lithium consumption stemming from stronger BESS demand.
And on the truck front, while passenger EVs were currently the biggest driver of demand, accounting for 69% of lithium consumption in CY25, "recent channel checks with industry participants highlight heavy haul truck electrification as an emerging growth area''.
