Why are large cap lithium stocks outperforming: Pilbara Minerals, Allkem

A hotter-than-expected US inflation report last Tuesday triggered a brutal selloff for global equity markets. But that was hardly the case for large cap lithium stocks like Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE).

Both stocks have recouped most of last week's losses, with Pilbara Minerals briefly rallying to a fresh all-time high on Tuesday.

Unstoppable spot prices

Resource company valuations are ultimately dictated by the spot prices of what they're producing.

Chinese lithium carbonate prices hit a record high of 500,500 yuan (US$71,315) a tonne last Friday.

This follows seven months of range bound trading for carbonate prices, bouncing between highs of 500,000 yuan and lows of 460,000 yuan.

Source: TradingEconomics

On the demand side, China's Passenger Car Association forecasts EV sales to reach 6m this year, more than double the 2.9m sold in 2021. Whereas the supply side has been crimped by ongoing power issues in China due to heatwaves, a hydro power crisis and the looming winter heating season.

Bloomberg reported that "fresh concerns over the supply and price outlook prompted Chinese authorities to haul in lithium miners, refiners and other industry groups for a new meeting last week."

"Officials asked major firms to ensure prices don't hugely deviate from their production costs and urged consumers to strike long-term agreements," in an attempt to stabilise prices.

Large caps outperform

There's no denying that many small-to-medium cap lithium names have outperformed large caps over a longer time frame.

However, at least in the last month, the share prices of explorers and emerging producers have stalled, while large caps have continued to push ahead.

Lithium miners 1-month share price performance comparison (Source: TradingView)

Why?

Explorers aren't producers: The only companies that can leverage current sky high lithium prices are the producers. During reporting season, Pilbara Minerals posted a 3,700% jump in earnings to $814.5m and grew its cash balance by almost 500% to $591.7m. The company said it will use its growing cash position to fund further growth initiatives.

Producers are relatively de-risked: For the most part, producers don't have to worry about things like economic studies, permits, project financing and construction.

Where's the capital going: If large caps are rallying while the rest of the market is struggling, it goes to show where institutional money going.