Shares of Albemarle (ticker: ALB), the largest lithium miner globally, experienced a significant decline of nearly 10% in midday trading. Meanwhile, the S&P 500 and Dow Jones Industrial Average saw more modest decreases of 0.7% and 0.5%, respectively.
The drop in Albemarle’s stock can be attributed to BofA Securities analyst Steve Byrne, who downgraded his rating on the stock from Hold to Sell. The new price target of $161 per share is considerably lower than the previous target of $212, with the stock currently valued at $153.17 as of Wednesday.
Byrne’s analysis suggests that the supply of lithium is anticipated to exceed demand in 2024 and 2025. This projected surplus would place substantial pressure on profit margins for all lithium producers.
According to Byrne, “The change in ratings is influenced by the challenging market conditions affecting profitability, as well as Albemarle’s high capital expenditure. While increased spending will likely result in strong volume growth over the next five years, we believe that the current risk-to-reward ratio is balanced, and current share prices already reflect much of this anticipated growth.”
Over the past year, Albemarle’s stock has plummeted by approximately 40%. This decline aligns with the decreasing benchmark lithium prices, which have fallen from $77,000 per metric ton to $25,000.
Lithium serves as a crucial raw material in the production of lithium-ion batteries utilized in electric vehicles (EVs). Although EV sales have surged in China, Europe, and the U.S., the prices of commodities do not always directly correlate with the demand for the final products they contribute to.
Supply and Demand in the Lithium Market
Supply and demand dynamics play a crucial role in determining the price of lithium, a vital component in lithium-ion batteries. While the demand for lithium continues to grow, there are concerns about the supply-side dynamics, as highlighted by industry expert Bryne. According to Citi analyst Jack Shang, lithium buyers in China are currently utilizing their existing inventories instead of purchasing more, leading to downward pressure on prices.
Albemarle’s Challenges
Albemarle, one of the key players in the lithium market, faces some specific challenges. One significant setback for the company was its failed attempt to acquire Liontown Resources, a promising lithium start-up based in Australia. Albemarle’s offer of three Australian dollars per share was withdrawn after another major mining company purchased a 19.9% stake in Liontown.
As a result of this development, Liontown shares have not been trading since the bid was withdrawn. Prior to Albemarle’s bid, the shares were valued at approximately A$1.50 and reached A$2.79 on Friday. Citi analyst Kate McCutcheon downgraded her rating on Liontown shares from Hold to Sell following the withdrawal of the bid. Her new price target is A$2.30 per share, down from A$3.
Analyst Predictions and Recommendations
It is worth noting that Bryne’s perspective is not shared by the majority of analysts covering Albemarle stock. As many as 79% of these analysts rate Albemarle as a Buy, surpassing the average Buy-rating ratio for stocks in the S&P 500, which stands at about 55%. The average analyst price target for Albemarle’s stock is approximately $248 per share.
While a downgrade to Sell does not affect the overall Buy-rating ratio, it increases the proportion of analysts who rate the shares as Sell. Currently, about 7% of analysts hold a Sell rating, which is relatively consistent with the average for the S&P 500.
In conclusion, the dynamics of supply and demand, as well as recent developments within Albemarle and the lithium market, have spurred varying perspectives among analysts. Only time will tell how these factors will shape the future of the industry.
