Released yesterday, the report suggested that lithium prices could fall by 45% by 2021 due to the introduction of new supply.
MS analysts believe electric vehicle penetration will be insufficient to offset new, low-cost lithium supply from Chile.
“A host of lithium projects and expansion plans, threaten to add circa 500,000tpa to global lithium supply by 2025,” the report said.
“Included within this, is increased production by low-cost Chilean brine operators SQM and Albermarle, adding circa 200,000tpa (by 2025), increasing Chile's share to a third of global supply (from 24% in 2017), driving down the cost curve and challenging higher-cost operators in China and Australia that are also expanding.
MS expects the additions to “swamp” forecast demand growth.
“As a result, we forecast 2018 to be the last year of global lithium market deficit, followed by significant surpluses emerging from 2019 onwards,” it said.
“It would take much higher EV penetration rates (from around 1.6% in 2018, to around 13.7% in 2025, versus MS estimates: 9% penetration for 2025) to offset these surpluses and balance the market, in our opinion.”
MS expects carbonate prices to fall from US$13,375 per tonne this year to $11,250/t next year, $8523/t in 2020 and $7332/t in 2021.
As a result, earnings estimates across its six covered lithium stocks – SQM, Galaxy Resources, Orocobre, Tianqi Lithium, Albemarle Corporation and Mineral Resources – were cut by an average of 26% for 2020, well below consensus.
MS analysts downgraded Albemarle and SQM to underweight and Galaxy to equal weight, with MinRes and Tianqi as its top two picks.
Global Lithium president Joe Lowry described the forecast as a “big miss” and thanked Morgan Stanley for the buying opportunity.
“The ‘analysts’ at Morgan Stanley predicting a steep lithium price decline prove they don't understand supply, demand or the cost curve,” he said.
Benchmark Mineral Intelligence managing director Simon Moores agreed.
“Don't usually comment on forecasts but the Morgan Stanley lithium one is ridiculous,” he tweeted.
“When you understand even the basics of lithium, cathode and battery plants, and auto majors plans you realise the Morgan Stanley scenario has a 1% chance of happening.”
Still, SQM’s shares slumped by 9% in Chile and Albemarle’s by 7.3% in New York overnight.
In Australia this morning, Orocobre fell by 7.5%, Galaxy by 5.8% and MinRes by 1%.