Investing in lithium in times of volatility and uncertainty

Lithium prices climb, oversupply fears hit the market

Lithium is a key raw material used in batteries that power electric vehicles (EVs), and the EV industry is the primary driver of demand for this product. However, just a few years ago, the EV narrative had yet to materialize, with much of the discussion around the need for lithium focusing on expectations for future EV sales.

In 2018, lithium prices were in a downward trend and they remained at low levels for a few years. This followed the lithium run in 2016 and 2017, as a surge in supply hit the space and the growth of electric vehicles slowed.

Fast forward to the end of 2020, six months into one of the COVID-19 pandemics, and lithium prices had taken a turn because EV adoption had started to surge.

Last year alone, sales of electric vehicles reached 6.6 million worldwide, leading to an increase in demand for lithium. Prices for every lithium product soared to all-time highs as investment poured into the sector.

“Never in my wildest dreams did I think we’d see lithium spot prices of US$70,000 (per metric ton), so I’m very happy to see that. I think there are a number of reasons behind this, whether or not it’s speculation, stockpiling and of course outrageous demand in China,” said Chris Berry of House Mountain Partners. .

“But I really have no idea if we’re going to US$100,000, or wherever we’re going,” he said. “I’m just a lot more focused on when this cycle gets a little long in the tooth, and when we mean coming back, where do we land?

Lithium prices have remained at all-time highs so far in 2022, although they have started to stabilize. Moreover, this year, lithium producers have seen their profits increase and they have revised their forecasts for the coming year upwards; the juniors also receive offers for a production that has not yet seen the light of day. Once-suspended expansion plans are back on track, with project announcements and restarts advanced.

But after months of optimism about lithium and rising stocks, in June investment bank Goldman Sachs (NYSE:GS) released a report saying the bull market in battery metals is over for now. Company analysts expect lithium prices to fall over the next two years, with a “sharp correction” by 2023.

“(There has been) an increase in investor capital into investing in long-term demand-side supply of electric vehicles (EVs), essentially trading a market-driven commodity as a forward-looking stock. future,” Goldman Sachs analysts said. in turn, generated an outsized supply response well ahead of the demand trend. »

It took little time for lithium experts and analysts to call out Goldman Sachs, with many, including major lithium producers, disagreeing with the bank’s forecast.

Daniel Jimenez of iLi Markets told Investing News Network (INN) that investment banking analysts are overestimating supply and underestimating demand.

“On the supply side, they are extremely optimistic about lepidolite production that could come from China in the coming years, which is also not realistic,” Jimenez said. “Bottom line – we think it will be quite the opposite.”

Speaking to INN about the lithium space in late June, Joe Lowry of Global Lithium pointed out that building a giga-factory can take two years, but it takes up to 10 years or more. to set up a lithium greenfield project.

“You couple that with the fact that demand is growing every year more than the overall market in 2016. That’s a huge difference,” he said.

For the expert, another key factor to remember is that, despite the current high levels of lithium, prices do not solve all the challenges the industry faces in supplying the market. “High prices don’t increase the talent pool, high prices don’t change licensing rules in various countries where projects are underway,” Lowry pointed out.

For William Adams, head of base metals and battery research at Fastmarkets, it’s also important to remember that when new supply comes online, each of those new production lines must be qualified.

“So that means that many potential consumers won’t take this material until they see this new production line running stably. And once they have that, they will take samples and qualify them,” he told INN.

So are fears of an oversupply of lithium justified?

“Right now, we’re in a situation where there just aren’t enough units,” Jon Hykawy of Stormcrow Capital told INN. “We are not producing enough lithium to meet latent demand.”

But for McKinsey’s Ken Hoffman, that might not stay the case long term.

“Despite having such incredibly high prices today, I would be concerned that there could be periods in the future of, and I can almost guarantee, oversupply. That’s just the way the industry works,” he told INN.

“One thing we say to customers is make sure you’re embedded in this industry, make sure if you’re going to build a lithium facility, you have a customer that you’re embedded in.”

Investing in lithium when uncertainty is high

Oversupply worries aren’t the only factor impacting lithium stocks, with worries about inflation and the future of the economy currently at the forefront of investors’ minds.

As recession fears soar, consumers are worried about rethinking their vehicle purchasing options, or even postponing their adoption of plug-in hybrids or battery-electric vehicles for a while.

“But you’ve seen what gasoline prices have done. So there is a countertrend,” Hykawy said. “We’re going to come back to a point where we’re going to have pretty much unlimited discussion about adopting these and other vehicles.”

Reviewing the overall performance of the stock market today, he said investors should keep in mind that the stock market works in cycles. “The old adage is that the stock market can stay irrational for far longer than you can stay solvent – it’s never going to go away,” Hykawy noted. “The point is, I’m further encouraged by the continued optimism and directionality that automotive OEMs are placing on this space, and the continued focus on growth that’s currently being reflected in the lithium market.”

For the expert, the optimism is justified at this stage. “The stock market will eventually overcome whatever is happening and it will come back,” he said.

When considering how to invest in lithium given general market conditions, it is important for investors to consider their timeframe. An investor who thinks quarter by quarter is different from one who has a longer term perspective – until the end of 2023, for example.

“I think right now you’re pretty cautious,” Berry told INN in late June. “If you step back and say, ‘Okay, let’s think about how big this industry will be in 2025 or 2030,’ today’s volatility just doesn’t carry the same weight in terms of concerns. So that’s how it is. that I tend to watch these markets.

Given the supply challenges the industry has faced bringing new production online and changing demand, Berry remains optimistic about the long-term prospects for lithium. “I would expect to see, at best, very tight markets for a lot of battery metals, and no oversupply for the next few years, at least. So I see no reason why you wouldn’t maintain not that kind of long-term bullish view,” he said.

For investors interested in lithium stocks, Hykawy suggested looking at projects that can profitably produce lithium at a reasonable long-term cost.

“That long-term cost of lithium probably looks like US$15,000 a ton, maybe not US$70,000. But $15,000 to $20,000 is probably a reasonably conservative to pessimistic level for determining whether a project is profitable,” he said. “It’s the place you’re looking for, and there are plenty of projects that can do it. It’s really about finding the ones further down the development chain and getting them into production.

For Hykawy, if investors can find a solid lithium brine project, it’s probably a worthwhile investment.

“But I would advise any group, including financial investors, who are interested in producing lithium on a timescale ⁠— rather than just an open and necessary need in this space ⁠— I would advise them to look hard – at rock projects instead,” he said. “Because, yeah, maybe your recoveries aren’t good. Yes, maybe your costs are higher than you thought. But at least you would produce units, and with a brine, that’s not guaranteed.