Albemarle Corp’s lithium business – the world’s largest producer of the battery metal – is overvalued and likely to be hampered by oversupply concerns for the foreseeable future, JPMorgan analysts said on Friday, pushing the company’s stock down more than 5%.
The blunt assessment of the company, which supplies the white metal for use in Teslas and other electric vehicles, comes as prices plunge due to oversupply.
Lithium companies have produced far more lithium than the EV industry needs this year, prompting Albemarle Chief Executive Luke Kissam to warn of “challenging market conditions” on Thursday.
“We think Albemarle is overvalued,” JPMorgan’s Jeffrey Zekauskas said in a note to clients. The bank downgraded Albemarle to “underweight,” encouraging investors to sell, and cut its price target to $60 per share from $68.
Zekauskas added that the bank believes the multiple the lithium business is trading at – about 13 times earnings – is not sustainable.
Charlotte, North Carolina-based Albemarle did not respond to requests for comment.
The stock fell 5.3% to $67.58 in late Friday afternoon trading. Shares are down nearly 30% from a high for the year reached last March.
In response to growing shareholder angst, Albemarle earlier this week said it would cut $100 million in costs. The company had already slashed its forecast and pared back expansion projects.
Global trade tensions, slowing growth and the scaling back of Chinese EV subsidies have also undermined lithium demand. Lithium carbonate prices in China – the world’s largest consumer – are down 65% to $8,500 per tonne since the start of 2018, according to data from Benchmark Minerals Intelligence.
A Benchmark global price index is down about 52% in the same time period.
While Albemarle sells much of its lithium on long-term contracts, executives are now renegotiating many of those deals. They have little leverage amidst the price drop.
That’s a key worry for JPMorgan: “There is too much lithium in the market available at low prices, and the business models of the battery makers are under pressure in using Albemarle material.”
In addition, the global EV sales growth rate has cooled to 20% so far in 2019, compared to a 50% growth rate in 2018, the bank said. That could further pressure prices for the metal.
“Albemarle contends that current lithium spot prices are a bottom for the industry. We are not so sure,” JPMorgan’s Zekauskas said.