Goldmans report puts fear of God into metals stocks

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by Glenn Dyer

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Thanks in part to a negative report from Goldman Sachs shares in lithium miners in Australia lost a lot of ground yesterday.

Goldman Sachs said in a report issued last weekend in holidaying America that the price of three key battery metals — cobalt, lithium and nickel — will drop over the next two years after investors wanting exposure to the green-energy transition invested too soon.

“Investors are fully aware that battery metals will play a crucial role in the 21st century global economy,” Goldman analysts Nicholas Snowdon and Aditi Rai said in the report that surfaced post break on Tuesday and had an impact on some share prices yesterday.

“Yet despite this exponential demand profile, we see the battery metals bull market as over for now,” the note claimed.

At the same time Credit Suisse added to the gloom by claiming the lithium market will be in surplus by 2025 and they cut the ratings on Pilbara Minerals and Allkem.

And while the long-term prospects for battery metals remains strong due to the rising demand for EVs (plug-ins and battery, but especially battery powered models) investor enthusiasm has led to an oversupply, according to Goldman Sachs.

There’s been “a surge in investor capital into supply investment tied to the long-term EV demand story, essentially trading a spot-driven commodity as a forward-looking equity,” the analysts said.

“That fundamental mispricing has in turn generated an outsized supply response well ahead of the demand trend.”

That will be music to the ears of many EV producers, led by Tesla’s Elon Musk who has been moaning for months about rising metal prices, especially lithium.

Tesla and several Chinese EV makers have lifted prices in recent months in response to the higher prices for key metals but the key influence so far this year has been the lockdowns in parts of China, led by Shanghai which have cut the number of EVs sold (and ICE powered vehicles) but not drastically.

That saw shares in some key Australian companies tank – Pilbara Minerals lost 22% to $2.30; Sayona Mining shed more than 118% to 18¢ Liontown Resources slumped more than 19% to $1.145, shares in Allkem sold down 15.4% to $11.60 and shares in IGO lost 11.7% to $11.16.

And shares in Chalice Mining (no lithium but copper, nickel and PGE 3 minerals as well as cobalt) saw a 7.2% slide to $5.90.

Goldman Sachs said there will be a “sharp correction” in lithium prices looming, with the metal averaging under $US54,000 a tonne this year, down from a spot price of over $US60,000.

It’s expected to fall further to an average of just over $US16,000 next year.

Cobalt will probably drop to an average of $US59,500 a tonne next year from roughly $US80,000 now.

And nickel prices could rise 20% this year to around $US36,500 tonne before tumbling, according to the Goldman Sachs report.

In the US shares in Albemarle fell nearly 4% off the back of reports about the contents of the Goldman Sachs report.

But the report was issued before China officially launched its 33-point stimulus plan on Tuesday

A key part of the plan – at all levels of government – national, provincial and local – is the use of tax cuts and subsidies to keep sales of NEVs going (NEVs are New Energy Vehicles or EVs and hybrids).

The plan calls for the expansion of private investment, accelerating infrastructure construction and stimulate purchases of cars and home appliances to stabilise investments.

To revive investment and consumption, the government ordered localities not to expand curbs on auto purchases and said those which already have curbs in place should gradually increase their quotas on car ownership.

Shanghai said this week that the city’s administration will give a 10,000-yuan ($US1,502) subsidy to customers who replace old internal combustion engine cars with electric vehicles (NEVS, or new electric vehicles in China).,

The Ministry of Finance also said on Tuesday that it would halve the purchase tax for small-engined cars.

The situation remains unclear because the stimulus package was only formally released on Tuesday but it is clear sales of NEVs are to be encouraged for the rest of the year – the major question is whether the pre-existing 20% subsidy on NEV purchases will be extended past its end date at the finish of calendar 2022.

Allowing that subsidy to expire without replacing it with a new subsidy system would probably make the Goldman Sachs’ gloom on metal prices come true. Extending subsidies in some form would see NEV sales remain buoyant.

The reports and downgrades should be regarded as timely wake up calls that nothing rises forever and that the higher the price, the nastier the fall.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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