Brenton Saunders: Why the lithium tide is set to turn in 2026

Lithium is finally starting to emerge from a prolonged downturn. Pendal’s MidCap Fund portfolio manager BRENTON SAUNDERS details the catalysts driving this recovery.

• Rapid rise of energy storage systems (ESS) is driving lithium demand
• Market could move into supply deficit in 2026
• Find out more about the Pendal MidCap fund

The lithium sector has struggled over the past three years as a flood of supply entered the market and drove prices down, but Saunders says following this extended downturn it looks like 2026 could see supply level out and potentially even move into a deficit.

One factor that is contributing to this recovery is the ramp-up in the roll out of energy storage systems (ESS), which historically have only been a small part of lithium demand.

“It was always expected that ESS would be a big part of the market, but it really took a long time to gather a head of steam, whereas electric vehicles got underway really quickly and then were growing pretty consistently from fairly early on,” says Saunders.

“The ESS space has been quite nascent for a long time and now is growing fast off a reasonably big base,” says Brenton.

In a short period of time, ESS rollouts have accelerated and are up 70-80 per cent in the past year.

“Whilst the range of forecasts for next year is very wide, it looks like it’ll be up quite substantially in excess of what the electric vehicle growth rate has been,” explains Saunders.

“The growth rate for demand of lithium in electric vehicles has been in the mid-20 per cent range. Estimates for ESS demand growth are between 30 per cent and 90 per cent year on year.”

Another contributing factor includes the curtailment of some lithium production capacity, which although not the biggest driver of the recovery, the amount shelved has not been immaterial, according to Saunders.

There has also been a dearth of new projects funded, built and commissioned in the past two to three years, and China has initiated a review of lithium mining permits which has resulted in the cancellation of permits that have not complied with proper permitting processes, further impacting mine supply.

“That has definitely created quite a big gap in supply over the last three to five months which has helped the lithium price stabilise,” says Saunders.

This has prompted brokers and consultants to shift from predictions of intractably large surpluses through to 2030 to a balanced market and maybe even a small deficit by 2026.

Lithium stocks on the move 

Saunders says these factors flow into investor perceptions about the prospects for lithium stocks with the rising price.

Two lithium-exposed stocks in the Pendal MidCap Fund are Pilbara Minerals (PLS) and Mineral Resources (MIN), but Saunders also sees potential in IGO (IGO) and Liontown Resources (LTR) – two stocks not currently in the fund.

Diversified producer IGO has a 49% stake in a lithium joint venture with China’s Tianqi Lithium Corporation, which has a majority stake in the Greenbushes lithium operation in Western Australia.

Liontown, meanwhile, is producing lithium spodumene from its Kathleen Valley operation in Western Australia and investigating the potential to upgrade the spodumene to higher value lithium products.

The rising lithium price means the midcap producers will become more profitable and those with debt on the balance sheet will be able to pay it down more quickly, according to Saunders.