Lithium stocks stumble from April highs: Chinese prices stall and Tesla set to resume Shanghai production

Fears about hawkish central banks, slowing Chinese economic growth and a global recession has weighed on the once bullish lithium sector. 

A large cap leader like Pilbara Minerals (ASX: PLS) has reverted back to December 2021 levels and down around -25% from April highs.

The pullback has varied significantly among the small-to-mid cap end of town, from April highs:

• Core Lithium (ASX: CXO) -22%

• Essential Metals (ASX: ESS) -25%

• Sayona Mining (ASX: SYA) -27%

• Liontown Resources (ASX: LTR) -40%

• Lake Resources (ASX: LKE) -44%

As lithium euphoria comes back to Earth, here a few things to consider.

#1 Demand supply narrative intact

According to Benchmark Mineral Intelligence, lithium demand is forecast to reach 2.4m tonnes by 2023, around 4 times the 600,000 tonnes forecast to be produced in 2022. 

Another report published by McKinsey came up with similar predictions.

However, McKinsey believes the lithium industry can keep up with demand in the second half of the decade, assuming new technologies such as direct lithium extraction and direct lithium to product can be commercialised.

Source: McKinsey

#2 Chinese lithium prices

Chinese lithium carbonate prices have inched lower to 457,500 yuan a tonne, down from highs of 500,000 yuan and the lowest since February.

Source: TradingEconomics

Sentiment across Chinese lithium participants has been extremely mixed in the past two weeks.

A few industry participant quotes from commodity price reporting agency, Fastmarkets, include:

• Chinese trader: "The markets are very transparent. Buyers know that domestic prices in China are lower and the Chinese yuan is getting weaker, and they expect seaborne lithium prices to drift lower."

• East Asia consumer: "We have been short on several hundred tonnes of lithium hydroxide every month recently, and the spot market is tight."

• Chinese producer: "Sellers are keeping their offers for lithium carbonate firm in expectation of higher prices when demand bounces back after the lockdowns in China are lifted."

• Chinese domestic traders: "I've heard no offers for hydroxide this week. The market is extremely quiet. Sellers know there is no buying interest even if they issue offers."

#3 China reopening

China's economy deteriorated faster-than-expected in April following the release of industrial output, retail sales and fixed asset investment data this week - all of which came in below expectations.

Harsh covid-induced lockdowns across the country, notably in Shanghai, has weighed on economic growth prospects.

More specifically for the lithium sector, China's auto sales hit a 10-year low in April, and new energy vehicles (NEV) sales fell by almost 40% on-the-month due to covid.

Lockdowns in China are expected to ease in the coming weeks, with Shanghai hopes to fully resume normal orders of production and life by mid-to-late June, according to Vice Mayor Zong Ming.

Tesla's Gigafactory 3 in Shanghai is said to be producing 1,200 Model 3 and Model Y vehicles a day after it resumed operations on April 19, according to Yuantalks.

This output represents approximately 45% of its full capacity.

#4 Respect the market

Global equity markets have faltered under concerns about higher interest rates, stubborn inflation and recession risks.

This risk-off environment has turned the market's focus from growth rates to valuations and current cash flow - perhaps why sectors like energy, banks and utilities have managed to outperform.

The market has managed to bounce in the past few days, but more strength and consolidation is needed to show that we've managed to find a bottom after an abysmal start to the year.