Did the Liontown bid trigger a short squeeze for lithium stocks?

It's been a week since Albemarle lobbed an unsolicited $5.5 billion bid for Liontown Resources (ASX: LTR), which triggered a broad-based rally for most ASX-listed lithium names.

This comes at a time when short interest has been aggressively rising for most larger cap lithium companies. As of Wednesday 22 March, several high-profile lithium names topped the short interest leaderboard including:

• #2 Core Lithium with 10.04% short interest

• #4 Liontown Resources 8.91%

• #6 Sayona Mining 8.61%

• #13 Vulcan Energy 6.67%

• #18 Lake Resources 6.34%

Its worth noting that short selling data is four trading days behind today's date as reporting is not mandatory until three business days post trade.

Today's data refers to short interest for stocks on Thursday, 30 March or two days after the Albemarle bid.

Lithium short interest: Where is it now

Nothing’s changed

Short interest has hardly flinched after the Albemarle bid.

Most of the names on the list above rallied at least 10% on 28 March. But short interest pulled back 0.5% to 1.0% at best.

Established producers like Pilbara Minerals and Allkem managed to extend days 2-3 days after the bid. The price action was more volatile and weak for emerging names and explorers.

If you look at Core Lithium, the stock rallied 15.4% on 28 March and then fell for the next five straight sessions or down 10.6%.

Why didn't shorts cover?

Lithium valuations have experienced a substantial de-rating since late January, in-line with how spot prices have been performing. On Monday, Chinese lithium carbonate prices hit 225,500 yuan a tonne, marking a 46th straight session of declines and a fresh 16 month low.

As with most commodity-related companies, they live and die by the spot price.

Only Liontown shares have remained relatively steady, around the $2.60 mark. Whereas the takeover bid may have acted as a one-off sugar hit for the broader sector and so far, those gains have been relatively short lived as lithium prices continue to trend lower.

Last Friday, Reuters reported that China's top producers agreed to set a price floor of 250,000 yuan a tonne for lithium carbonate. Some of the comments were quite grim, including:

• "Offers as low as 150,000 yuan were also heard in the market this week as traders sought to offload mounting stocks, said a buyer for a battery manufacturer."

• "However, some buyers were sceptical that producers would stick to the floor price, given the sluggish demand."

• "If we don't buy, someone will eventually drop the price," said a lithium carbonate buyer briefed on the decision.

Will a price floor be enough to stabilise prices? Or will the demand and supply dynamic continue to deteriorate?

It's also worth noting that Albemarle had previously made a $2.35 per share bid on 3 March 2023 and a $2.20 per share bid on 20 October 2022. Is there also the possibility of another bid?