Lithium stocks surge as Chinese giant suspends major mine

Pilbara Minerals (ASX: PLS) is on track to record its best day since March 2023 after rallying as much as 17% in early trade on Wednesday. This surge comes on the heels of breaking news from China, reported by UBS' China lithium analyst Sky Han.

Major lithium and battery manufacturer CATL has officially announced the suspension of its lithium lepidolite operation in Jiangxi. While rumors of CATL cutting or suspending lithium production in Jiangxi have circulated before, UBS expresses higher conviction this time. According to their channel checks with several contacts, CATL made the decision to suspend operations after a meeting on September 10.

Interestingly, this news didn't impact Tuesday trading. Chinese lithium carbonate futures remained flat around 72,400 yuan a tonne, while local lithium names like Gangfeng and Tianqi were trading 1.5% and 3.6% lower, respectively.

The significance

UBS notes that spot prices for lithium have been below CATL's cash cost level since mid-July 2024. While they previously believed CATL would tolerate losses in its lithium business, the company's decision to suspend operations after two months of losses and continued downside risk on lithium prices represents a normal supply response from a marginal-cost producer.

CATL's suspension is expected to result in an 8% cut in China's monthly lithium carbonate equivalent production, or about 5-6,000 tonnes. As a result, UBS projects a positive impact on lithium prices, forecasting an 11-23% upside for the remainder of 2024.

Chinese lithium carbonate futures are currently trading 5.5% higher to 76,700 yuan a tonne but still down around 27% year-to-date.

ASX lithium stocks soar

It's a rare sea of green for local lithium stocks on Wednesday, led by Mineral Resources.

The below list of lithium stocks are up an average 11% on Wednesday. However, this uptick comes against a backdrop of significant losses over the past twelve months, down an average 67.5%.

Data as at 12:20 pm AEST, Wednesday 11 September 2024

Short covering

Short sellers have been piling into lithium stocks for the past two years.

As Pilbara Minerals Chief Executive Dale Henderson explained last year: “There appears to be a component of the market that wants to short lithium pricing and given that there’s no available mechanism to do that, they have gravitated, it would appear, to Pilbara as a proxy for the lithium market because of our scale, pure play exposure and our liquidity."

Pilbara Minerals three-year short interest chart (Source: Shortman)

Pilbara Minerals is the most shorted stock on the market with 20.37% of its shares shorted (as at 4 September 2024). Other lithium-related companies are also experiencing significant short interest:

• #4 (most shorted) Liontown Resources 10.8%

• #10 Sayona Mining 9.86%

• #12 Mineral Resources 8.59%

• #24 Core Lithium 6.04%

• #38 Vulcan Energy Resources 5.08%

• #53 Ioneer 4.11%

While the short-to-medium term outlook for lithium remains uncertain, a recent unexpected supply cut has triggered a pronounced one-day rally. This sudden upward movement typically leads to short covering, as short sellers buy back shares to limit potential losses. This buyback activity can further propel share prices upward, potentially explaining the strong rally observed in lithium stocks on Wednesday.