Why is the Pilbara Minerals (PLS) share price running high?

Posted: 31 December 2021 12:06 pm
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The lithium producer’s market value has surged 2.5 times over the last 12 months.

Lithium producer Pilbara Minerals (ASX: PLS) has been one of the success stories of 2021, with the stock’s value surging more than 2.5 times over the past year. Shares in the company have hit record levels in recent weeks, and in early trading on Friday, hit a fresh 52-week high of $3.30.

Why has the PLS stock price taken off?

The latest surge comes just weeks after the Western Australia-based lithium miner told the market it would cut shipments due to commissioning delays, unplanned shutdowns and skilled worker shortages.

But that is likely to still benefit the company, as it further exacerbates the tight supply for the key raw material used in electric-vehicle batteries. Investors are betting 2022 is set to be another good year for lithium.

According to recent estimates by S&P Global Market Intelligence, in 2022 demand for lithium is expected to be around 641,000 mt of lithium carbonate equivalent (LCE), while supply is expected to be 636,000 mt, leaving a market deficit of around 5,000mt.

While miners are scrambling to expand capacity, they haven’t been able to keep up with demand, as seen in the case of PLS itself, so a tight market is likely to persist in the near term.

The deficit is expected to continue even for the longer term. Fitch Solutions is predicting increasingly large deficits out to 2030 that could “deeply” alter the market’s dynamics.

Rising demand, prices

A rapid surge in the demand for electric vehicles, cheap operating costs and government subsidies have helped keep the demand for lithium strong. UBS analysts have forecast that annual EV industry-related demand for lithium-ion batteries will surge to 2,700 GWh by 2030, about 13 times current production.

That underlines Pilbara Minerals’ status as a key supplier to the global lithium market. In FY21, the company’s shipments more than doubled to 281,440 dry metric tonnes. For the current fiscal year, despite slashing forecasts, Pilbara still expects shipments to rise to between 380,000 and 440,000 tonnes.

Given the tight supply, it has lifted the forecast for average price in the December quarter to the top end of its $1,650 to $1,800 per ton guidance range. Pilbara has already achieved a peak spot price of $2,350 a ton, on an online auction platform in October.

In line with that sentiment, analysts at Macquarie Group have put a "Buy" rating on the Pilbara Minerals stock price, with a $3.70 price target.

Meanwhile, analysts are also betting on a spate of mergers and acquisitions activity in the sector in 2022 as the major global miners increasingly compete with Chinese firms to expand exposure to the battery metal. That should help lift valuations for players such as PLS.

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