Goldman Sachs Statements on Lithium Prices Depart from Reality
Goldman Sachs is at it again. After the publication of their report “The End of the Beginning” in June this year led to a sell-off across all publicly traded lithium issuers, they have apparently doubled down on that sentiment, stating in a letter to investors they expect “overcapacity and slowing (electric vehicle) sales’ could soon seriously slow the lithium market”.
Despite that, they revised their prediction of a 76,000 for 2023 tonne surplus downward from the June statement.
Since the publication of its bearish sentiment on June 1st triggered a sell-off in lithium stocks, the commodity futures price of lithium has risen by 12.9%…a rather poignant demonstration of the problematic issue of such an influential institution publishing predictions that are flat out wrong.
But I finally got around to absorbing the entire Goldman research report, and the contradictions in sentiment in it are so rife that I had to keep starting over to believe my eyes. If anything, the data referenced in the report suggests the bull market is about to become much more entrenched.
For example, this statement:
While the battery metals bull market appears to have peaked, our new metal price forecasts are still higher than historical 5-year average levels (especially for Nickel). Further, spot and contract lithium prices have diverged meaningfully in recent months, especially for the lithium hydroxide market which is dominated by contract-pricing, and we expect contract prices to lag spot prices by 2-3 quarters. Overall we raise our 2022E-25E global average battery pack price forecasts by 8-26% and expect the battery price to peak in 2023.
If the battery price forecast is expected to rise by 8 – 26% over the next 3 years, how could the price peak in 2023? With inflation well above 8 percent in all markets, that doesn’t even make sense.
This suggests that the battery metals market is anything but over. Not only is nickel expected to lead the price appreciation trend among the bat metals, but the selling price of batteries is also expected to rise. How does that support any terminal point in the bull market?
Goldman’s own chart points to increasing lithium demand while there is a complete absence of analysis on the supply side to justify the overarching sentiment:
Goldman Sachs has a Conflict of Interest
In the June 2022 article, Goldman Sachs discloses potential investment banking relationships with several battery and/or cathode manufacturers. Specifically,
Goldman Sachs is acting as a manager, or co-manager of a pending underwriting for CATL , has received compensation for investment banking services in the past 12 months from LG Energy Solution, expects to receive or intends to seek compensation for investment banking services in the next 3 months from CATL, LG Energy Solution, Samsung SDI Co and SK Innovation.
So one possible explanation for Goldman being so contrary to what its own data is saying is that it may serve the interests of its investment banking group to lower the valuations of its clients’ suppliers ahead of any major capital raise.
For the record, here is Goldman’s chart on their price expectations for the next year:
Benchmark Mineral Intelligence, on the other hand, expects a continuation of the steady increase in lithium carbonate and hydroxide prices as indicated by their chart below.
We shall see. But if the track record on lithium holds, Goldman Sachs bearish proclamations might be viewed is bullish indicators.
What about the quality of supply-side projections?
There exists a historical correlation where rosy projections of imminent supply side additions are ultimately optimistic at best if not downright fraudulent in many cases. I won’t present examples here to avoid liability, but suffice to say that resource investors have seen many projects portrayed as certainties become historical footnotes.
At the analytical layer of investment bank scrutiny, the quality of projections might be overlooked if it serves some interest elsewhere within the enterprise to accept rosy projections. Since Goldman Sachs, by its own admission, is chasing investment banking business from some of the world’s largest battery component manufacturers, that conflicted interest is enough to drive such oversight.
But other factors often result in the elimination or delay of new supply side projects that might have been seen as credible.
The emergence of a socialist government in Chile has thwarted investment in new Chilean supply.
In Utah, US Magnesium is trying to get permits to expand two intake canals into Great Salt Lake to increase the water intake from the lake to 100,000 gallons per minute. The lake is already at historic lows, and public opposition to the addition of industrial capacity being extracted from the lake is looking like it could block the permits. US Magnesium extracts mostly other products from the lake, but says it could add 10,000 tons per year of lithium to that mix if it could be granted the additional permits.
So while Goldman Sachs might account for this as credible future supply, reality may paint a starkly different picture.
In Argentina, whose share of global lithium supply has risen to 16 percent due to rapid development and permitting of various salars, an NGO called Fundacion Ambiente y Recursos Naturales (Environment and Natural Resources Foundation) issued a report in May 2022 that makes 9 recommendations to the communities and governments in Argentina, that, if implemented, could hinder many of the projects the Goldman Sachs supply-side scenario predicts.
These are the less visible headwinds that might render the quality of projections upon which these macro pictures lie somewhat deficient.
Far be it from to imply that my depth of access and connectivity within the lithium supply side is better than Goldman Sachs considerable research resources. But given Goldman’s rather flagrant track record of selecting data that suits its narrative in industry, it is incumbent on investors to question the data behind the data to obtain a more nuanced perspective.
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