Why bulls and bears are wildly divided on lithium, Pilbara Minerals and IGO Ltd

Lithium's spectacular boom and bust still translates into volatile price action for many of the ASX's most-traded stocks on a daily basis. 

Unfortunately, for anyone caught holding Pilbara Minerals (ASX: PLS), IGO Ltd (ASX: IGO) and Mineral Resources (ASX: MIN) professional investors are still sharply divided on their outlook. 

On the plus side, lithium is a beneficiary of strong long-term demand growth for batteries and the strength of demand growth is tipped to outpace almost every other commodity over the next decade. 

Batteries accounted for around 90% of global lithium demand in 2024, but prices have still slumped 80% since 2023.  This is because new supply has topped demand, so it's worth considering whether this is a permanent change, or an opportunity to ride a mega-growth trend at discounted prices. 

Bears will argue supply is rapidly growing and not just out of Australia. It's coming from low-cost producers in Africa, South America, and China to mean ASX investors in local plays are on the edge of a capital sinkhole. 

So therefore, it's a mistake to assume the market's dynamics aren't shifting in a structural way, with selling lithium exposure the right strategy today. 

The below chart from the International Energy Agency (IEA) shows how a supply response to high prices quickly caught up with demand between 2021 and 2024. 

The IEA says swift supply increases out of China and Africa for battery metals show how it's easier to bring on new lithium supply, versus traditional metals like copper where BHP (ASX: BHP) is investing heavily.

"Since 2020, supply growth for battery metals has been twice the rate seen in the late 2010s. As a result, following the sharp price surges of 2021 and 2022, prices for key energy minerals have continued to decline, returning to pre-pandemic levels," said the IEA.

"Lithium prices, which had surged eightfold during 2021-22, fell by over 80% since 2023. Graphite, cobalt and nickel prices also dropped by 10% to 20% in 2024."

In particular the IEA says a major portion of lithium supply growth is coming from Zimbabwe and Argentina. China is also working to tap many other African countries for cheap lithium supply. 

Sell, sell, sell

Last week, broker UBS spread the gloom by telling investors to sell the local market's two star producers in Pilbara Minerals (ASX: PLS) and IGO Ltd (ASX: IGO). 

It also said to sell former lithium darling Liontown Resources (ASX: LTR), with a 50 cent price target.

UBS' resources team has cut its forecasts for benchmark spodumene prices containing 6% lithium to $US717 a tonne in 2025, before climbing to $US750 a tonne in 2026, and $US825 a tonne in 2027. 

In June, lithium prices tumbled below $US600 a tonne to mean only the lowest cost miners in Australia can dig and ship it at a profit. Many mines or projects are already on care and maintenance or shelved altogether. 

Still, UBS expects prices to rise further in 2029 and the IEA suggests the market will fall back into deficit by the 2030s. 

"For lithium, near-term markets appear well-supplied," the IEA said. "But rapidly growing demand is expected to push the market into deficit by the 2030s. However, the prospects for developing new lithium projects are much more favourable than for copper."

It's worth noting forecasts by professional bodies have been wrong in the past and could be wrong again to both the upside, or downside. 

The future is inherently uncertain. So, I don't think it makes sense for investors to try and predict an unknowable future beyond far out time frames like 2028. 

Arguably then the growing supply means lithium stocks look largely speculative for now, and I wouldn't bet heavily on a recovery. Notably, BHP has always shunned the sector in favour of another clean energy ingredient in copper. 

Bull case

Others like Morningstar think the likes of Pilbara Minerals and IGO Ltd are cheap as soaring demand for batteries will push lithium prices higher again. 

On June 3, Morningstar valued Pilbara Minerals shares at $3, with more than 60% upside for the operator of the Pilgangoora Mine, based on Wednesday's share price of $1.24. 

"We estimate that Pilgangoora’s cash costs will average about USD 400 per metric ton over the next decade, which is below our midcycle price forecast for spodumene concentrate of USD 1,200 per metric ton," Morningstar said. "As electric vehicle adoption increases, we expect high-double-digit annual growth in global lithium demand."

Morningstar also reckons IGO Ltd is a buy as the co-owner of the low-cost Greenbushes Mine in Western Australia. 

"Greenbushes is the highest-quality hard rock lithium operation in the world. The mine produces spodumene concentrate, the feedstock for the battery compound lithium hydroxide," Mornignstar said. 

"Greenbushes’ cash cost of around USD 200 per metric ton in fiscal 2024 sits comfortably below our long-run price forecast for spodumene concentrate of USD 1,200 per metric ton and places the mine at the bottom of the hard rock lithium cost curve."

IGO shares last fetched $3.94 are are down 34% over the past 12 months. Morningstar thinks this is cheap based and values the stock at $6.50 based on its forecasts for a lithium price rebound.