CITIC SEC: The sharp drop in lithium prices is not due to a worsening of the fundamentals, and there is a possibility of stabilizing and rebounding to 150,000-200,000 yuan/ton in the future.

CITIC SEC released a research report stating that lithium prices dropped significantly last week, primarily due to a substantial increase in weekly inventory driven by adjustments in the statistical caliber and samples of lithium carbonate inventory reported by SMM, rather than a material deterioration in the industry's fundamentals. CITIC SEC expects that the recovery in lithium battery production in September will lead to considerable demand growth, with the increase in overseas supply not matching the demand increase, which may further widen the supply gap in the industry. The week-to-week inventory fluctuations are unlikely to reverse the fundamental logic of the industry, and it is anticipated that short-term lithium prices have already experienced a significant overshoot, with a recovery expected to stabilize and rebound to 150,000-200,000 yuan/ton, thereby boosting the lithium sector. The increase in SMM lithium carbonate industry inventory led to a significant drop in lithium prices last week. According to Wind, the main contract for lithium carbonate futures fell by 9.0% to 142,000 yuan/ton last week, with significant volatility. CITIC SEC believes this is primarily due to the updated lithium carbonate inventory data from the third-party consulting agency Shanghai Metals Market (SMM). As per SMM, the newly added lithium carbonate inventory data on September 4 amounted to 169,300 tons, while the large sample inventory published by the agency the day before was 75,700 tons. The addition of nearly 100,000 tons of inventory has led to a pessimistic outlook on the fundamentals of lithium carbonate in the market, causing a sharp drop in lithium prices amid panic. Single inventory data may be biased, and lithium salt inventory will continue to decrease in September. CITIC SEC believes that the lithium salt inventory data from a single agency may have research biases, as adjustments in inventory data caliber and samples are common in the industry. Factors such as sample coverage rates, current statistical caliber, statistical methods, changes to estimation models, revisions of historical data, and whether the statistical scope includes factory inventory and in-transit inventory should be considered. Short-term data fluctuations do not necessarily indicate a significant change in supply-demand fundamentals and are likely due to the iteration of statistical rules. CITIC SEC emphasizes the need to analyze the fundamentals by combining inventory data with recent supply-demand data. According to Dazhong Shidai Think Tank, lithium battery production in September is expected to increase by 9.1% month-on-month, with CITIC SEC estimating the corresponding increase in lithium carbonate demand to be 15,000 tons LCE. CITIC SEC anticipates that the increase in supply will come from a higher arrival of lithium concentrate at ports in Zimbabwe, with smooth shipments from companies such as Sinomine Resource Group leading to an expected month-on-month increase of 8,000 to 10,000 tons LCE in lithium salt supply. Thus, the supply shortfall in September is likely to intensify, and the amount of lithium carbonate being destocked will increase, while the destocking trend for lithium salts remains unchanged. The real inventory level will gradually emerge, and sudden changes in future inventory data will decrease. CITIC SEC believes that the true inventory level in the lithium carbonate industry has been difficult to confirm due to the presence of some hidden lithium salt inventories that are hard to determine, making it challenging for consulting agencies like SMM to completely account for invisible inventory. However, as the futures market matures, some hidden inventories are gradually revealed through hedging, and the registration data for lithium carbonate futures warehouse receipts can somewhat reflect changes in hidden inventory. By combining upstream and downstream inventory, trader inventory, and futures warehouse receipts data, one can gain insights into the overall inventory trend in the industry chain. Moreover, as the lithium industry matures, the accuracy of inventory statistics will improve, and sudden changes in inventory are expected to decrease. Short-term inventory changes are unlikely to affect long-term trends, and lithium prices will still be determined by long-term fundamental trends. In the long run, the change in commodity prices is still determined by macro trends and industry fundamentals. Looking back at the current upswing cycle of lithium carbonate, during the phase when the market anticipated rapid future demand growth for lithium batteries and frequent supply disruptions, the increase in weekly lithium salt inventory could not reverse the upward trend of lithium prices; conversely, during the phase of weaker future demand expectations for lithium batteries, although weekly lithium salt inventories continued to decrease, lithium prices remained on a downward trend. Therefore, CITIC SEC believes that week-to-week inventory fluctuations cannot reflect medium- to long-term trends, and judgments should be made based on monthly trend changes combined with industry data to avoid interference from high-frequency noise with the core investment logic.