The powerful rally in lithium stocks is not sustainable for all companies in the sector, strategists warn, meaning investors will need to become more selective if they want exposure to one of the hottest pockets of the local sharemarket.as tight supply has been met with booming demand fuelled by the transition to electric vehicles.
“So of course, when lithium prices do eventually pull back, there are going to be some fairly big pullbacks in some of these exploration assets.” “We think the ability of a producer to realise prices closer to a rising spot is a key factor in picking relative outperformance in the sector,” UBS analyst Lachlan Shaw said in an April note.There is often a difference between spot prices – the current price of an asset – and the realised price a producer receives. A key factor is how the miner’s order book is compiled in terms of the proportion of sales done on a fixed price agreement, compared to those that reference the spot market.
UBS expects the industry to gravitate closer to spot pricing and noted some producers are moving towards this to capture current prices. “The raw material suppliers are in a very strong position to negotiate, particularly if they can grow production over time because the people they have offtake agreements with are scrambling for resources and are more likely to deal,” says David Franklyn, portfolio manager of Argonaut’s Natural Resources Fund.
The real opportunity is over the next three to five years when market dynamics mean supply can’t respond quickly enough to the pace of demand, which should keep prices elevated.
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