Breaking down the lithium sell off: A bearish S&P Global, spot prices and technicals

It’s been a staircase up but elevator down kind of narrative for large cap lithium names like Allkem (ASX: AKE), Pilbara Minerals (ASX: PLS) and Core Lithium (ASX: CXO).

Since mid-November, the sector has been hit by compounding bad news ranging from bearish notes from investment banks, falling spot prices and surging covid cases in China.

Here are a few factors to consider about the recent pullback.

S&P Global Platts: Prices lack momentum 

Market sources told S&P Global Platts that prices are “starting to lack momentum for a further increase as downstream consumers show less buying interest at current levels”.  

“Sources expected that Chinese lithium prices could fall back to a reasonable range in 2023 on growing mine capacity and lower production costs; however, risks remain as Chinese producers cope with growing inflation and obstacles to secure seaborne raw materials,” said S&P Global analysts in a report last week.

“As the investment and exploration of lithium mines continue to accelerate, global lithium resources could increase significantly in the second half of 2023, which will reduce the production cost for lithium chemicals to some extent.”

However, the analysts said the market could still sit in an outsized deficit of 605,000 tonnes of lithium by 2030 if capital investment falls short.

There were also warnings that Chinese EV sales could slow in 2023 after “subsidies for new energy vehicles, or NEVs, are removed and oil prices come down.”

"If EV sales are worse than expected, then we could see a bigger impact on lithium prices," said a Chinese producer.

Lithium carbonate prices ease

Chinese lithium carbonate prices have eased from recent highs of 597,500 yuan to 582,500 yuan a tonne, a fall of around -2.5%.

Lithium carbonate prices (Source: TradingEconomics)

Lithium selloff: Through a technical lens

Lithium heavyweights Allkem and Pilbara Minerals sold off on rather heavy volumes last Friday, with turnover of approximately 88% and 64% of their 20-day average volumes respectively. 

The Black Friday selloff follows a similar-sized tumble just eight days prior, inspired by a bearish Goldman Sachs and Credit Suisse report.

So now you have an event where investors who absorbed the selling from eight days ago are now underwater. And those who brought last Friday are sitting around breakeven.

Are these lithium majors oversold? Increasingly yes. Their relative strength indexes are around 37. A reading below 30 means the stock is extremely oversold, 50 represents neutral and 70 indicates the stock is extremely overbought.

Even if they do bounce, a lot more is needed to repair the otherwise damaged trend and heavy distribution that the stock was under.

Allkem share price chart (Source: TradingView)