Lithium stocks roll over: Macquarie remains bullish, Allkem faces heavy selling

Lithium exuberance has rolled over rather quickly in the last 24 hours amid growing concerns that the peak is in for once surging spot prices.

One of the main culprits behind the selloff was Pilbara Minerals (ASX: PLS) and the results of its 12th BMX spodumene auction, which achieved a realised price of US$7,552/dmt.

The result was down -3.2% compared to the record US$7,805 auction in November and the first month-on-month decline in five months.

Holding up but not enough

Pilbara Minerals' spodumene auctions have increased (versus the prior auction) on every single occasion except July and December.

The July decline was during some of the most economically crippling restrictions in China, where major cities including Shanghai, Beijing and Guangdong faced full-blown lockdowns.

This time round, investors are viewing the price decline as not so much a blip but a potential peak.

"The fact that this is a decrease vs the prior auction is giving this outcome extensive market attention, as it can be seen as a leading indicator for other spodumene prices," said Morgan Stanley in a note on Thursday.

Pilbara Minerals' spodumene auction results can be a leading indicator for other price benchmarks (Source: Morgan Stanley)

China's still-strong EV sector

Morgan Stanley's autos team notes that China's EV sales are "regaining steam as more cities ease Covid curbs and ... growing market anticipation of stimulus/subsidy extensions into 2023."

China's EV output increased 0.78% month-on-month and up 65.6% year-on-year to 768,000 units in November and sales were up 10.1% month-on-month and 72.3% year-on-year at 786,000 units, according to Fastmarkets.

This compares to country's broader autos sector, which produced 2.39 million units in November, down -8.2% from October.

Still bullish on Pilbara Minerals: Macquarie

Macquarie might take the title as one of the most bullish brokers on the lithium sector, retaining an OUTPERFORM rating for Pilbara Minerals with a $7.60 target price.

This target price target not only represents 88% upside to current prices ($4.04) but also 34% above the stock's previous all-time high ($5.66).

Macquarie expects still-strong lithium prices to bolster the company's FY23 earnings, including estimates of a maiden 34 cents per share dividend and $2.72bn in net profits (FY21: $561.4m).

Heavy selling volume

Allkem (ASX: AKE) was never quite been the same after its -12.4% selloff on 15 November.

The stock's volume profile is one of the more clearer examples of when capital begins to rotate out of a stock. Here's a summary of the three major dips and volume change (vs 20-day average).

• 15 November : -12.4% (+153%)

• 25 November: -8.6% (+88.5%)

• 15 December: -4.9% (+50.8%)

Allkem (Source: TradingView)