Brighter Lithium Outlook Boosts Our Valuations

We have updated our medium-term lithium price outlook and now expect that supply and demand will reach a balance in 2021, one year earlier than in our previous forecast. As a result of continued rapid demand growth, lithium prices should stabilize in 2020 and rise thereafter. Our long-term lithium carbonate price forecast of $12,000 per metric ton in 2020 real terms based on published London Metal Exchange prices is unchanged.

We forecast electric vehicles and hybrids will make up 20% and 30% of new auto sales in 2030, respectively. Given this combined with growing lithium demand from batteries for energy storage and other transportation including buses, motorcycles, and commercial delivery vehicles, we forecast lithium demand will grow from 295,000 metric tons in 2019 to 1.9 million metric tons in 2030, which represents a 19% annual growth rate.

To meet this demand, lower-quality, higher-cost resources will need to come on line, which will shift the cost curve higher. This shift will support higher long-term prices, underpinning our long-term forecast.

We've raised our fair value estimate for Sociedad Química y Minera de Chile SQM to $60 per share from $57 to reflect our higher medium-term price outlook. Our narrow moat rating, largely based on SQM's cost-advantaged lithium production resources, is intact. SQM's shares are up over 20% in 2020, as we think the market is beginning to account for long-term lithium demand growth from greater electric vehicle adoption that will drive long-term prices higher. Still, we continue to view SQM as materially undervalued, with the shares trading in 5-star territory.

Having updated our model to reflect higher medium-term lithium prices, we've raised our fair value estimate for Livent LTHM to $15 per share from $14.50. Our narrow moat rating, based on Livent's cost-advantaged production, is intact.

There were few surprises in Livent's detailed fourth-quarter results and 2020 guidance. In January, management announced preliminary results and provided a high-level 2020 outlook for lithium EBITDA to decline despite higher volume. Management now expects the midpoint of adjusted EBITDA to be roughly 27% below 2019.

Livent's shares were down by double digits the day after the earnings release, as we think the market was surprised by the magnitude of the profit decrease in management's 2020 guidance. We have long predicted that 2020 would see lower lithium prices than 2019. Given this and Livent using a greater proportion of higher-cost purchased carbonate, unit margins will be squeezed this year. However, we continue to view Livent as undervalued.

Albemarle's ALB fourth-quarter results and 2020 guidance held few surprises. Management largely maintained its forecast from the initial outlook presented at the investor day in December: It expects lithium EBITDA to fall 20% year on year, while bromine and catalysts should remain stable. As such, we have made few changes to our 2020 outlook for the company.

After updating our model to reflect higher medium-term lithium prices, we've raised our fair value estimate for Albemarle to $125 per share from $120. Our narrow moat rating, largely based on Albemarle's cost-advantaged lithium production resources, is intact. The shares rallied on the company's outlook, but we continue to view Albemarle as undervalued. The shares are up over 30% in 2020, as we think the market is beginning to account for long-term lithium demand growth from greater EV adoption.