Lithium stocks tumble after Morgan Stanley flags fall in both price and exports

A bearish lithium note by Morgan Stanley has triggered a broad-based selloff among local names, with heavyweights Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) down a respective -5.4% and -3.9% in early trade.

Morgan Stanley said it observed a 'large fall' in lithium exports and prices from one of the world's largest producers - Sociedad Química y Minera (SQM).

Export data for September flagged a -10% month-on-month decline in SQM volumes and a -11% month-on-month decline in prices.

SQM prices fall but Albemarle prices still trending higher (Source: Morgan Stanley Research)

SQM volumes decline but Albemarle volume still solid (Source: Morgan Stanley Research)

Analysts including Javier Martinez de Olcoz and Vincent Andrews said that part of the decline could be explained by product mix.

Export volumes for the more expensive high purity carbonate was down -12% on the month, but prices still fell in all other categories including other carbonate (-17%) and hydroxide (-5%).

Just a 'yellow flag' at this point

SQM told Morgan Stanley it still expects to see flat prices in the second-half of 2022.

This means the price and volume decline could just be an anomaly arising from "a particular shipment and maybe by the additional lithium sulphate sent to their new the hydroxide plant in China."

The analysts also speculate that SQM could be "holding part of its capacity increase, to sustain spot prices in China."

Supply tight narrative still intact

"Recent Lithium price peak had a clear implicit message: demand is strong and inventories are tight," said the analysts.

"Although we have mapped some amounts of new supply, we expect the market to remain tight through 2022,especially when considering restocking needs."

"We still expect lithium prices to trend lower in 2023, as supply expands and market tightness eases."

"Expectations are too high"

SQM shares closed the overnight session -8.4% lower to a fresh 3-month low.

Morgan Stanley said it remains Underweight on SQM as it believes that "expectations are too high at the peak of the cycle and that the shares will underperform when the lithium price starts to fall in 2023e."

"We acknowledge that earnings momentum should continue over the next quarters, driven mainly by lithium operations, but in our opinion long-term expectations are disconnected from fundamentals," the analyst warned.

Sociedad Química y Minera (SQM) share price chart (Source: TradingView)