How Morgan Stanley Made Lithium Inexcusably Cheap

Lithium stocks saw better days in early 2018.

Albemarle (ALB) slipped from a high of nearly $140 to $86.75.

Sociedad Quimica y Minera de Chile (SQM) fell from $64 to less than $46 before recovering.  FMC Corporation (FMC) plummeted from $98 to less than $75.

All thanks to a bearish forecast from Morgan Stanley, whose analysts predicted that lithium prices would fall significantly by 2021 on the heels of a massive spike in global supply.

They estimated that supply would far outweigh demand.

But as it turns out Morgan Stanley may not understand lithium at all when it comes to supply, demand or cost curve, according industry analyst Joe Lowry, of Global Lithium LLC. 

"Morgan Stanley's predictions of an additional 200K MT of supply from Chile by 2025 and a steep price decline is another demonstration of the "big name" analysts not understanding lithium supply, demand or the cost curve. Albemarle's La Negra II expansion taking years to ramp up is just one example of the difficulty bringing new capacity on-line. SQM has little incentive to expand beyond the ~50K MT required in their new agreement. The statement that 500K MT of new capacity will be online by 2025 is well off the mark"

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Even worse for Morgan Stanley, miners didn’t agree either.

According to Ken Ken Brinsden, chief executive of Australian lithium miner Pilbara Minerals, “I am firmly of the view that everyone, including Morgan Stanley, is grossly underestimating how quickly the market is moving on the demand side.”

Also, “Forecasts of oversupply also fail to take into account that few lithium processors have the capacity and ability to produce the very high-grade lithium compounds that batteries need,” said analyst Andrew Miller at Benchmark Mineral Intelligence, a UK-based battery metals consultancy, as quoted by Reuters.  

Even Citigroup believed the lithium market was okay.

Citi argues that "we do not see a collapse in contract Li carbonate or hydroxide prices as predicted by the bears." Citi believes "a flat contract pricing scenario" is more likely -- and even there, the analyst doesn't think we'll see lithium prices flatten until "2019."

So, we really have to wonder what Morgan Stanley was thinking here.

But we should thank them, too. 

Without such poor analysis, we wouldn’t be gifted such an opportunity to buy exceptional lithium stocks at bargain basement prices. ALB for example expects for full-year 2018 revenue to fall in a range of $3.2 billion to $3.4 billion, with adjusted diluted EPS expected to fall between $5.00 and $5.40 this year.

That would represent year-over-year EPS growth of 9% to 17%.

Citigroup even upgraded the ALB stock to a buy from a neutral rating with a $106 price target from an initial target of $95, arguing that ALB “is one of the few producers that can provide reliable, large quantities of top-quality” lithium carbonate/hydroxide to battery makers.

These aren’t stocks to fear based on nonsense reporting from Morgan Stanley.

These are stocks you buy on ridiculous, and excessive fear.

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