Lithium stocks have had a difficult run this year, but experts believe there are several catalysts that will help boost lithium prices in 2020.
Lackluster electrical vehicle adoption and oversupply issues have caused the lithium price to slip over the last year. However, supply cuts from major producers like Albemarle Corp. (NYSE:ALB) and Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) are expected to eventually lead to a supply crunch that will give the lithium market a much-needed boost.
Let’s take a look at the issues the lithium market faced in 2019, the upcoming catalysts that could result in a rebound, and the lithium stocks you might want to consider adding to your portfolio in the new year.
Lithium Stocks Face Hardship in 2018 and 2019
As mentioned, lithium stocks have had a challenging couple of years. After lithium prices soared in 2017, they dropped pretty quickly in 2018 and have continued downward throughout 2019. In fact, the global average of prices has dropped over 50% since the start of 2018.
Lithium carbonate prices in China have gone down by 65% to $8,500 per tonne since the beginning of 2018. Meanwhile, lithium hydroxide is selling for $16,000 per tonne in China compared to $20,000 per tonne just six months ago.
Geopolitical uncertainty and trade frictions have rocked the entire commodities market and have naturally had a negative effect on the lithium price. However, perhaps the biggest issue being faced by the lithium market is an oversupply concern.
At present, the global lithium supply exceeds demand by roughly 5%, mainly due to falling electric vehicle sales in China, the world’s largest electric vehicle market.
To combat the slump, major lithium producers like Albemarle and SQM have responded accordingly to combat the current oversupply woes. Albemarle decided to delay construction at the Wodgina mine in Australia, which would add 125,000 tonnes of additional lithium processing capacity.
In May, SQM also decided to delay expansion at the Atacama salt flats in Chile until the end of 2021 amid slumping lithium prices. Initially, the company planned to expand its production capacity to 120,000 tonnes by the end of next year, which is 50,000 tonnes more than the current capacity at the mine.
Then in October, Indigenous protestors blocked access to the SQM Atacama salt flats amid nationwide rallies over social inequality. Although the road blockage didn’t hinder operations at Atacama, it did alleviate some of the oversupply concerns gripping the market, causing the Solactive Global Lithium Index to rally.
Major Catalysts Expected to Boost Lithium Prices
Despite its current dire state, many experts believe that the lithium market will rebound in the next year. If major lithium producers continue to cut production, current supply levels will eventually align with the growing global demand for lithium-ion batteries, which could help significantly boost lithium stocks.
Lithium-ion batteries, which are used in electric vehicles, power tools, and mobile phones, have become an essential component in our day-to-day lives. So, while the demand from China has dwindled, the appetite for these products isn’t going anywhere. In fact, the lithium-ion battery market is expected to reach $77 billion by 2024 and then go up to $100 billion USD the following year.
Major automakers like BMW and Volkswagon are looking to produce all-electric fleets of cars throughout the next decade, which will triple the global demand by 2025 to 917,469 tonnes. EV sales are expected to increase significantly in the short-term, reaching up to 4.5 million units by 2020 and a whopping 10 million by 2025.
Of course, EV sales will largely depend on China’s appetite for electric vehicles, which have been on the decline for three consecutive months due to changes to the Chinese EV subsidy program. Luckily, the European market could pick up the slack.
The European Union is the second-largest market for EVs, and thanks to tighter restrictions, EV sales in the EU have increased by 51.8% in the third quarter.
The consumer electronics market will also contribute significantly to the growing demand for lithium-ion batteries.
Another reason the lithium market is expected to bounce back is that the current oversupply is “an air pocket that detracts from the building wall of demand,” according to Benchmark Mineral Intelligence’s Simon Moores.
Moores explained that a lot of the excess lithium on the market is technical grade, which is the kind used in stopwatches and other small electronics. He added that much of the industry’s capacity to produce the high-quality, battery-grade lithium needed for EV batteries is locked up until 2024.
And let’s not forget the expected development of a lithium price benchmark.
At present, there is no traded lithium price, which has led to unprecedented price volatility in recent years. In June, the London Metal Exchange (LME) and Fastmarkets, a leading source of pricing information for the global commodity markets, announced that they would be partnering to develop a lithium price benchmark.
LME and Fastmarkets are working to develop a definitive roadmap to provide a pricing mechanism that can be used throughout the supply chain.
Investing in Lithium Stocks
Although the lithium space will likely face continued hardships in the short term, the recent uptick of the Solactive Global Lithium Index suggests the market still has some fight in it.
Investors who are keen to gain access to lithium stocks might consider taking a safer route by investing in the Global X Lithium & Battery Tech ETF (NYSE:LIT), an exchange-traded fund that seeks to provide similar returns to the Solace Global Lithium Index.
The fund invests most of its $457 million asset pool into stocks, with its three top holdings being Albemarle, SQM, and Tesla (NASDAQ:TSLA). The Global X Lithium & Battery Tech ETF issues a 3.68% dividend yield and has a year-to-date return of -6.17%.
There are also a couple of lithium stocks that might be worth picking up. One of these is E3 Metals Corp. (TSXV:ETMC) (OTCPK:EEMMF), a lithium company with 6.7 million tonnes of lithium carbonate equivalent (LCE) inferred mineral resources in Alberta.
Last week, E3 announced that it is scaling up testing after collecting 20,000 liters of lithium brine from the Leduc Reservoir at its Alberta lithium project. Despite the volatile market, E3 stock is up 24.24% since the beginning of 2019.
Lithium Americas Corp. (TSX:LAC) (NYSE:LAC) is another stock that could be worth a second look. LAC released its third-quarter results earlier this month, which revealed a net income of $69 million thanks to the closing of the project investment of $74.5 million.
The company’s share price is currently down 14.32% so far this year on the TSX, while its NYSE stock has dropped by 11.11%.
Do you think the lithium market will pick up in 2020? Let us know in the comments!
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