The price of lithium has exploded in value over the past year. And so have many lithium stocks. Unfortunately, my portfolio hasn’t benefited from this, as I don’t directly own any miners of the silvery-white metal.
So have I missed the boat here or is this global mega-trend just getting started?
The case for buying lithium stocks
Lithium is a non-ferrous metal known as “white gold”, and is one of the essential components (alongside nickel and cobalt) in electric vehicle (EV) batteries. A smartphone battery only holds a couple of grams of lithium, but a lithium-ion battery pack uses around 8 kg of the soft metal.
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Lithium carbonate demand is estimated to rise from 500,000 tonnes in 2021 to 4m tonnes in 2030, according to McKinsey & Company. And around 90% of that lithium is expected to go towards the manufacture of batteries.
However, the exponential surge in demand for EVs is straining global lithium supplies. The world cannot mine the stuff fast enough. This has resulted in abnormally high profits for lithium miners.
The bull case rests on the assumption that this undersupply of lithium is structural (and not a short- or mid-term imbalance).
The case for avoiding lithium stocks
BYD is a Chinese battery and EV manufacturer that overtook Tesla this year in global EV sales. The firm’s vice president, Stella Li, recently said that she thinks current lithium prices are “unreasonable”. She’s predicting a surplus next year as new mines come online.
China is the largest EV market in the world by some distance. And the country also controlled 65% of the world’s lithium processing and refining capacity in 2021, according to Rystad Energy.
However, China’s access to lithium deposits accounts for less than 25% of the world’s resources. This has resulted in Chinese miners announcing a flurry of deals across Africa and South America in recent years.
The risk then is that a giant lithium bubble has been inflated. If that’s true, this could leave new investors extremely vulnerable were it to suddenly burst.
Indeed, Goldman Sachs recently predicted that the price of lithium carbonate could fall by three-quarters by 2024, as more supply comes to market.
Top lithium stocks to buy
The most eye-catching returns this year have come from the world’s second-biggest lithium producer, South American firm Sociedad Química y Minera de Chile (SQM). The stock is up 84% year to date.
SQM’s revenue for Q3 2022 was $2.96bn. That’s more in one quarter than the entirety of its 2021 revenue ($2.86bn)!
The world’s largest lithium producer is Albemarle. A large part of its lithium business is located at the Chilean resource of Salar de Atacama, in partnership with SQM.
Other smaller players include Atlantic Lithium and European Metals Holdings, both listed in the UK.
Will I buy lithium stocks?
I think there are too many uncertainties regarding the future price of lithium for me to feel comfortable investing today. I’m confident in the long-term demand for EVs, but much less so on what that means for today’s sky-high lithium markets.
I own shares in BlackRock World Mining Trust, which own a diversified basket of mining stocks. Some of these miners have substantial lithium operations, so I’m happy with that level of exposure as things stand.
