SQM (SQM) blew past Q3 earnings estimates late Wednesday, while announcing an expansion of output. SQM stock traded higher before the open but gave way to sharp selling in Thursday's stock market action, as recently highflying lithium stocks were being pounded for a fourth straight session.
XFollowing last week's 11%-14% surge for Albemarle (ALB), SQM and Livent (LTHM), the stocks tumbled have tumbled by double-digit percentages this week.
Lithium Stocks Hit By Peak Price Fears
Credit Suisse analyst Saul Kavonic attributed a 7% Monday drop in lithium carbonate futures pricing on the Wuxi exchange to "speculation in China that a major cathode producer might have slashed production targets and some Chinese firms forecasting softening in the market later in 2023."
Lithium prices had steadied by midweek. Still, some Chinese market analysts are predicting that the EV market will slow in 2023 amid a sluggish economy and potential expiration of subsidies. That could curb commodity speculation and hoarding, which some blame for the extent of the price run-up.
Caixin Global reported Wednesday comments by the chair of Eve Energy, China's sixth-largest battery producer, warning of an emerging supply glut for lithium by 2024. But he said that the high end of the market won't be oversupplied.
Tesla (TSLA), which has been ramping up output at its Shanghai factory, saw its pace of inventory accumulation in China last month, according to China Merchants Bank International. As a result, Tesla announced a cut in delivery waiting time for Model 3 and Model Y vehicles to as little as one week.
In a Thursday note, Deutsche Bank analyst Corinne Blanchard credited SQM with "another stellar quarter." Strong realized pricing will "likely erase any concerns that could have emerged in the last weeks going into year-end," she wrote.
"We are confident in the market dynamics based on our industry cross-checks and discussions with various lithium producers."
SQM Earnings
SQM posted Q3 earnings per share of $3.85, up 904% from a year ago and 51 cents ahead of estimates, according to FactSet. Revenue grew 347% to $2.958 billion, about $200 million ahead of views.
"We continue to see strong signals regarding the future demand growth of lithium," CEO Ricardo Ramos said in the earnings statement, noting over 40% demand growth in 2022. He noted that SQM has signed long-term contracts in the past few months to supply lithium to "the main players," which probably means EV makers.
SQM announced an expansion of lithium hydroxide capacity in Chile to 100,000 metric tons from 40,000, which "should be in full operation by 2025."
Ricardo added that SQM is optimistic after its initial tests of advanced evaporation technology and direct lithium extraction that it will bring "fundamental changes" to mining lithium.
Lithium Supply And Demand Outlook
Chinese firms aren't the only ones looking for softer lithium prices. Goldman Sachs reiterated its bearish call last week, with analyst Aditi Rai saying "overcapacity and slowing EV sales" should put downward pressure on lithium prices that's likely to build in the second half of 2023.
With weak global economic growth expected in 2023, a key question is the extent to which burgeoning EV demand can withstand cyclical softness. Goldman expects lithium supply to move from a 84,000-ton deficit this year to a 76,000-ton surplus, as softer demand meets higher output.
Yet lithium supply forecasts have a history of being too optimistic. Earlier this month, Albemarle reaffirmed its full-year guidance for lithium-division EBITDA growth of 500% to 550%. The guidance built in potential for upside in average pricing, but also some possible downside for Q4 volume growth, if production ramps hit some speed bumps.
The big picture is that automakers and battery suppliers are scrambling to attain the lithium supplies they'll need to meet their EV sales targets for 2024, 2025 and beyond. In July, General Motors (GM) agreed to pay Livent $198 million in advance to secure supply starting in 2025.
Few, if any, analysts expect lithium prices to remain at their current heights in China's spot markets for an extended period. But they don't necessarily have to for the stocks to be winners. That's partly because contract prices are significantly lower than spot prices and because profit margins can remain high at lower prices.
Lithium Stocks: SQM, ALB, LTHM
SQM stock dived 9.2 to 90.62 on Thursday, undercutting its 50-day line. For the week, SQM stock has tumbled nearly 18%.
SQM stock has a 115.82 cup-base buy point.
ALB stock fell 3.25% to 277.45 on Thursday, also slipping below its 50-day line. Since clearing a 308.34 official buy point last week, ALB stock has lost about 10%.
LTHM stock, which knifed through its 50-day line on Tuesday, fell another 3.1% on Thursday, bringing its loss to 16% for the week.
ALB stock is on the watchlist for the IBD Leaderboard portfolio of elite stocks. SQM is part of the flagship IBD 50 list.
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