It’s fair to say the heat has come right out of the lithium market. And I’m here to let you in on a secret…it’s only going to get worse.
If you’re holding bags of lithium stocks in the hope that things will only get better. Well, sorry, there’s a good chance they won’t.
This means you’ve got a decision to make. And you best make it now. If you wait too long, if you wait just 10 months longer, then I fear it may be too late altogether.
I know what it’s like to own stocks that are in the doldrums. I know what it’s like to buy more on the way down in the belief that sunnier days are just around the corner.
It’s an easy trap to fall into. Particularly when you’re blinded by stocks that have shown huge runs up before their crash.
I know what it’s like because I was a former holder of Babcock & Brown stock back in 2007, 2008, and early 2009. Thankfully it wasn’t a massive holding, but it was enough to get excited about on the way up and pretty disappointed with on the way down.
And…eventually…all the way down to $0. A valuable life lesson. And one that I hope to share with those that could now also be on the brink. In my view, there’s far more coming pain for lithium stocks.
Some of them may be forced into a change of direction. Some may end up in administration. Some may just end up as a holding vehicle until they can recapitalise into a new boom area like AI, wellness, fintech, or something else that could resurrect value.
Many are going to see more pain in the next year.
Yep, called it
Lithium batteries are a significant technology development. But they’re not the silver bullet for the world’s pollution problems.
The great silver hope isn’t lithium. Not to the extent that punters have made it out to be. I don’t doubt that we will continue to see more electric vehicles hit the market with lithium batteries. But not at the volumes you expect. And not as the only ‘green’ power option to choose from.
One of the reasons that the lithium boom just isn’t there is the fact that supply is readily coming to market from the like of Albemarle.
This isn’t any great shock. On 31 March 2016, in a Money Morning article titled, ‘Why I’m Not Tipping Lithium Stocks’, here’s a part of what I wrote:
‘…while there is an increase in demand for Li-on batteries, there’s more than sufficient supply to meet this need. More importantly, the major lithium producers in the world can meet any demand increase with ease.
‘As recently reported by Bloomberg:
“If all current lithium projects proceed as planned, they would deliver about 330,000 tons of lithium carbonate-equivalent by 2020, creating “a bit of an oversupplied market,” according to Citigroup.”
‘Australia is the world’s largest lithium-producing country. The single biggest known lithium reserve in the world is ‘Greenbushes’ in WA. This mine, however, is jointly owned by two of the world’s big lithium companies, Chengdu Tianqi Industry Group (China) and Albemarle Corp [NYSE:ALB]. Tianqi owns 51% and Albemarle 49%.
‘These two giants control a massive chunk of the global lithium market. Other majors include Chilean Sociedad Quimica y Minera de Chile [NYSE:SQM] and FMC [NYSE:FMC].’
I was crucified by lithium fans.
Here’s what one poster on a HotCopper forum had to say:
‘Meanwhile over at Money Morning they are talking down all Australian Lithium Stocks…
‘Check out this laughable quote. Why would anyone take this guy’s advice? (Sam Volkering)
‘“Now, it would have been nice to get into these junior lithium miners in the early stages of that hype cycle. General Mining is up 533% in the last year — 476% in last six months alone. Pilbara is up 826% in the last year. Admittedly, I missed both of these companies back in mid-2015.
But there are good reasons why I’m not tipping lithium stocks today.”
‘Clearly, he’s heavily into the majors and doesn’t want anything disrupting that…’
Here’s another happy punter’s strange analogy:
‘What are his good reasons for not tipping lithium stocks today?
‘There is always a comic relief in a movie that just doesn’t get it and claims that there won’t be an earth quake for instance and when it does happen are clinging to the leg of our hero’s girl as a deep crevice opens beneath. But she just kicks him away with her manolo blahnik and says, “you should have listened to John” (her partner who the comic relief always came to blows with and called his claims ludicrous) as the crowd cheers he falls away like Hans Guber into what looks like a never ending opening in the earth.
‘So yeah, what were his excuses for not liking lithium stocks?’
It’s worth pointing out when I wrote that article on 30 March 2016, lithium stocks were on fire:
- Pilbara Minerals Ltd [ASX:PLS] was trading at 44 cents
- Galaxy Resources Ltd [ASX:GXY] was trading at $1.32
- Infinity Lithium Corporation Ltd [ASX:INF] was trading at 11 cents, and
- Volt Resources Ltd [ASX:VRC] was trading at 3.4 cents
These are just some of the lithium stocks on the ASX, but most share a similar path.
At the close yesterday (20 November 2019), these stocks were trading at:
- Pilbara Minerals — 29.5 cents
- Galaxy Resources — $1.015
- Infinity Lithium Corporation — 6.3 cents, and
- Volt Resources — 1.2 cents
Over the last two years all the heat has come out of the lithium market.
The lithium giants like Albemarle are now even considering reducing output to try and steady market prices for lithium.
It’s going to get worse before it gets better
Supply is one problem facing the lithium market. Another is demand. And that comes down to cost. The expectation is that prices for the lithium powertrain in EVs would steadily and then sharply decline.
As a result we’d end up with millions of new EVs on the market, people buying ‘affordable’ EVs as new cars, and a happy joyous world for lithium miners.
Nope, that’s just not the case.
According to the MIT Technology Review:
‘The problem is that the steady decline in the cost of lithium-ion batteries, which power electric vehicles and account for about a third of their total cost, is likely to slow in the next few years as they approach limits set by the cost of raw materials.’
That means the promise of ‘affordable’ EVs just isn’t coming. At least not in the time frame people were expecting. And we know that it’s not just going to be a future with lithium batteries.
It will be a combination of fuel cell, hydrogen, lithium battery. Just like there are multiple choices at the pump today, there will be multiple choices at the charger tomorrow.
Furthermore, new battery tech from start-up truck maker, Nikola, says they’re made a breakthrough in battery tech that’s going to change the game.
They say they’ve made:
‘…a new type of battery cell with double the energy density, only 40% of the weight and half the cost of current lithium-ion batteries used in Teslas and other consumer-market electric vehicles.’
But they’re not saying exactly what the ‘secret sauce’ is for these new batteries. What we do know is they don’t use most of the metals found in lithium-ion batteries. And where they do, it’s a fraction of what the batteries today use.
However, they also say they won’t reveal this breakthrough for another 10 months.
My take is that you’d want to be well clear of lithium stocks by then.
However, this doesn’t mean the lithium industry is a dead duck. There’s still long-term potential for companies in this market. EVs aren’t going to flood the market in the next year. Demand isn’t suddenly going to shoot through the roof. Supply will still easily hit the market.
It’s beyond the next year where the opportunity will lie. The long game is still there. We will end up in a world without internal combustion engines and without petrol and diesel at the pump. It’s just going to take a while.
Short term though, as the heat and the hype comes right out of the lithium and battery metals markets, we see prices heading lower. But not forever.
There will be a cull of the fat. Quality lithium companies will survive. Long term they’ll even flourish. But I just wouldn’t bet on it in the next year. And definitely not in the next 10 months.
Editor, Money Morning
PS: Exclusive Investor Report: ‘Move Over Lithium — This Could Be the Best Resource Speculation For 2020’. Click here to learn more.