There have been some concerns aired in recent weeks about the resilience of the lithium market, Macquarie says, while identifying that there are still Australian producers that look attractive at current prices.
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What has concerned lithium market watchers?
The broking house said there were two news events which rattled the markets – a survey released by a Chinese consultancy, and media reports of tighter controls on new battery capacity approvals.
Macquarie said they did not see the latter as a great surprise.
In August, we flagged a softer market conditions in 1HCY27 as surplus concerns re emerge, potentially exacerbated by an accumulation of energy storage system (ESS) inventories across the value chain over the next six months. Our recent channel checks suggest tier-one ESS battery manufacturers are operating near full utilisation, while many tier-two and tier-three players remain below 50% utilisation. In our view, regulatory intervention is aimed at curbing further expansion of lower-quality, inefficient capacity rather than restricting end-market ESS deployments.
Macquarie said they suspected some of the market concern "reflects a misunderstanding of the policy intent, with capacity controls potentially lost in translation as ESS demand-side restrictions''.
Which ASX lithium companies are preferred?
Macquarie said among Australian producers, Liontown Ltd (ASX: LTR) and Elevra Lithium Ltd (ASX: ELV) had the greatest sensitivity to lithium price upside, "given their operating leverage".
They also said IGO Ltd (ASX: IGO) stands out for its attractive free cash flow generation across a range of lithium price scenarios.
Macquarie said re IGO:
Our base case forecasts FCF yields of 15% and 10% in FY27 and FY28, respectively. Even at a spodumene price of US$1,500/t, we estimate the company could still generate FCF yields of 7-9% across the same period. We note investor focus remains on cash distributions from TLEA, which have yet to materialise. In our view, a clearly defined cash sweep or distribution mechanism at TLEA could represent a re-rating catalyst for IGO.
Macquarie has a price target of $9.50 on IGO shares compared to $7.35 at the time of writing.
For Liontown, it has a price target of $1.50 compared to $1.07, and for Elevra, $12.50 compared to $6.97.
For PLS Group Ltd (ASX: PLS), it has a share price target of $6 compared to $4.42.
On the pricing for spodumene broadly, Macquarie said, "value continues to accrue upstream, reflecting persistent tightness in the spodumene concentrate market''.
They added:
While inventory levels may gradually rebuild as Zimbabwean supply returns, current market conditions remain supportive of concentrate pricing.
