Two stocks could rally as demand for lithium in China improves, according to Keybanc. Analyst Aleksey Yefremov upgraded chemical manufacturers Livent and Albemarle to overweight from sector weight. Both upgrades were connected to improving demand for lithium in China after a downturn that started in November. Yefremov said that checks on the lithium industry in China show that inventories for battery cells and electric vehicle original equipment manufacturers are declining and could bottom out in the coming months. Meanwhile, purchase orders from large buyers could resume in the near future. He said spot lithium has moved from long to tight already following a bounce off the cost floor. Yefremov noted the spot lithium carbonate price is up $3,977 per ton, or around 17%, from late April. Sales of electric vehicles, which typically use lithium in batteries, have also been rebounding off the slowdown seen in late 2022, he said. And Yefremov said recent price cuts to electric vehicles from original manufacturers could further boost demand. Outside of electric vehicles, demand remains strong for lithium, with Yefremov pointing to the nearly 200% stationary shortage grow in the first quarter. He said the supply and demand outlook should be “balanced” over the next year, which can help keep prices at current levels. Livent remains on track for expanding its lithium offerings, which Yefremov said can help volume in future years. He also said Livent, which announced an all-stock merger with Allkem this week, has less downside risk in its contract portfolio. Yefremov’s $30 price target for Livent reflects an upside of 17.6% over where the stock finished Wednesday. For Albemarle, Yefremov said that steady supply and demand could help EBITDA expansion. He said the company has limited downside risk after its recent guidance cut. Albemarle also has the potential to beat consensus estimates for 2024 as its costs for spodumene, which is used for things like ceramics and enamel, catch up to cooling market prices, Yefremov said. Yefremov’s price target of $270 implies the stock could rally 38.8% in the next year from Wednesday’s close. “Albemarle owns world-class resources at the bottom of the cost curve, and is well positioned to nearly triple 2023 lithium production over the next decade,” he said. — CNBC’s Michael Bloom contributed to this report.