Lithium ETF Powers Down on Morgan Stanley’s Dismal Forecast

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The lithium exchange traded fund has enjoyed rapid success over the years on the rising demand for electric vehicles. However, Morgan Stanley recently dumped a bucket of cold water on lithium bulls.

The Global X Lithium & Battery Tech ETF (NYSEArca: LIT), which tracks the full lithium cycle from mining and refining through battery production, plunged 3.9% Monday.

Lithium-related assets retreated after Morgan Stanley analysts argued that the growth of electric cars will be "insufficient" in offsetting the surge in lithium supply out of Chile, reports Henry Sanderson for the Financial Times.

The analysts project that new lithium projects and planned expansions out of the largest producers in Chile will "threaten to add" 500,000 metric tons per year to the global supply by 2025.

“We expect these supply additions to swamp forecast demand growth,” Morgan Stanley said.

Lithium prices have more than doubled in the past two years on rising demand for battery raw materials used in electric vehicles. For instance, a Tesla Model S incorporates more lithium in its batteries than 10,000 smartphones combined, according to Goldman Sachs.

Looking ahead, Morgan Stanley argues that the current year will mark the end of the global lithium deficit as there will be "significant surpluses" from 2019 onwards.

“It would take much higher EV penetration rates to offset these surpluses and balance the market,” the bank added, projecting that battery electric vehicles would need to make up 31% of global sales in 2025, compared to the current 2%, to "clear the market."

Morgan Stanley calculates that lithium carbonate prices could plunge to $7,332 per metric ton by 2021 and even towards its marginal cost of production of $7,030 per metric ton from the current $13,375 per metric ton.

Furthermore, the bank also downgraded its outlook on Albermarle and SQM, the two largest producers of lithium, to "underweight" from "equal weight."

Albermarle is Global X Lithium & Battery Tech ETF's top component holding at 17.5% of the ETF's portfolio, and Sociedad Quimica Y Minera is 7.6% of the fund's underlying weight.

Albermarle fell 7.4% and SQM declined 8.8% on Monday.

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