Since the start of 2018, the price for various forms of lithium has fallen steeply as supply comes online and structural changes to the Chinese market squeezed prices all the way to the finished lithium-ion batteries.
Bernstein analyst Paul Gait said in a note lithium producers' margins were far too high for a sustainable supply chain.
"Despite the price fall … lithium prices still imply astonishingly high returns on any investment in lithium production capacity," he said.
"Current lithium carbonate prices are in the range of US$10,000-15,000 per tonne depending on the exact price series one selects to look at, but according to our analysis, these prices would still imply IRRs of between 46% and 74% based on our representative list of 20 lithium projects from around the world."
Gait said looking at other market factors, a "fair" long-term lithium price was $8,000/t, as it would generate "appropriate investment" in production and meet rising demand while maintaining IRR levels for miners.
This is well down on his ‘fair' price from last year of $12,900/t.
Gait said lithium miners could not maintain high returns in the long-term because it was not tough to find or produce.
"The twin facts that the lithium geology is relatively simple, and that the sums of capital involved are relatively small combine, in our opinion, into an industry-wide phenomenon whereby potential incremental volume growth is not only plentiful, but also cheap, and able to be brought online in short order," he said.
Gait's approach has been criticised by specialists like Benchmark Mineral Intelligence in the past, who have said he neglects the processing side of the industry in his analysis.
Last week, Benchmark managing director Simon Moores said lithium was not just falling because miners had ramped up before the demand was there.
"If it was purely an oversupply situation that price would've continued going down, but there are still very strong demand fundamentals in the lithium space and the market is quite tight," he said.
Moores also said the brine ramp-up in Chile had been delayed, showing a switch could not just be flicked for more supply.
"By 2019-2020, people expected the brine expansions in Chile to be ramped up by now or plans in place to be ramped up in early 2020s, but actually Chile has had many political problems with SQM, and now with Albermarle as well, so you're not going to see significant expansions from Chile anytime soon," he said.
Gait's forecast is based on the historic IRR average for lithium projects of around 8% and the related supply forecasts for nickel and cobalt, as without a similar production jump on both metals, lithium-ion batteries cannot be made.
