Morgan Stanley weighs in on the Lithium debate engrossing markets

Morgan Stanley was out with an interesting research note recently, talking about the widely divergent views in the lithium market. The team notes that they have heard all sorts of views from investors, from “this is just another boom-bust commodity ready to collapse” to “this market has structurally changed in 2022 and elevated prices are here to stay. 

MS currently has a 20% below-consensus long-term lithium price forecast, but also a forecast of a structural shortage. Below are some of the debates/push backs from investors to Morgan Stanley’s view, as well as their responses:

• How can we have a below-consensus long-term price while forecasting large lithium shortfalls by the late 2020s?

On this point, MS notes that whilst lithium price should remain high enough to incentivise projects, the current elevated lithium prices could become a roadblock for demand. In the words of MS: 

“To get to almost 40 million BEVs being sold in 2030 (vs c.8 million units in 2022), EVs need to be priced much closer to ICEs, especially outside China. Elevated lithium prices are one of the barriers to cheaper EVs; at spot a typical EV contains about US$3,000 of lithium. So while the lithium price needs to be high enough to still incentivise most projects out there, in our view it needs to be low enough to actually enable mass-market adoption of EVs.

Charting lithium spot prices since 2015 (source: Morgan Stanley)

• Can Direct Lithium Extraction (DLE) be the game changer that stretches/flattens the cost curve?

On this one, MS remains sceptical, although they are watching a number of projects in Argentina, one of which ASX-listed Lake Resources (LKE) has an interest in. 

“While we don’t disagree that this technique has disruptive potential, uncertainty remains high. We really need to see such 'pond-free' lithium brine extraction advancing beyond the pilot/demo plant stage into commercial scale up. For now, we think it is justified to remain sceptical on DLE given limited evidence on its commercial/industrial-scale success.”

• Will China maintain its bumper growth-rates in EV sales through 2023, even without subsidies?

On this point MS is concerned about the impact of the end of subsidies, with their data indicating that BEV sales are already slowing. 

“After last year's bumper growth, we are especially concerned about China’s EV sales growth in 2023, as subsidies ended at year-end and China's BEV sales penetration is >23% already currently. Our Autos team sees China's BEV sales slowing from +80% over Jan-Nov 2022to +13% in 2023, which is the main driver for our view of lower lithium market deficit in 2023.”