Lithium Market Sees Turnaround as Supply Glut Eases, Raising Stakes for Short Sellers

Short sellers betting against the world’s leading lithium producers might find themselves in hot water as indications emerge that the lithium supply glut is dwindling. Esteemed financial institutions, UBS Group AG and Goldman Sachs Group Inc., have revised their 2024 supply forecasts downward by 33% and 26%, respectively. Morgan Stanley has also highlighted the potential risk of dwindling inventories in China, following a period where lithium prices plummeted due to supply outstripping demand, prompting some producers to scale back production.

This shift comes at a crucial time when lithium, a pivotal component in electric vehicle batteries, is witnessing price recovery after last year’s significant downturn. This downturn had sent shares tumbling and lured short sellers. Presently, short positions in Albemarle Corp., a top producer, and Australian mining company Pilbara Minerals Ltd. constitute more than a fifth of their shares, amounting to an approximate value of US$5 billion.

Jun Bei Liu, a hedge fund manager at Tribeca Investment Partners Pty Ltd., who maintains a long position in Pilbara, remarked that shorting the company could be “very dangerous” given the emerging signs of price stabilization for lithium.

An early indicator of this positive shift was Pilbara Minerals’ recent acceptance of an offer for a lithium spodumene concentrate cargo, which secures their offtake commitments up to December. Analysts, like Bloomberg Intelligence’s Mohsen Crofts, interpret this move as a sign of the commodity's price rebound.

This optimistic outlook has already posed challenges for some short sellers, as Albemarle and Pilbara Minerals witnessed approximately 20% growth in their stock prices in February. Meanwhile, the Solactive global lithium index, which follows 40 of the most significant and liquid lithium-related firms, saw a 10% increase, rebounding from a nearly 20% drop in January.

Despite these developments, some remain skeptical about the market’s recovery. Goldman Sachs cautioned against viewing the surge in lithium contracts as the conclusion of the bear market, pointing out the ongoing surplus. However, other market analysts anticipate price stabilization, with Canaccord Genuity Group Inc. suggesting a return to “sustainable” levels and UBS projecting a market rebalance prompted by production curtailment from some miners.