Why is the lithium price dropping? Will lithium prices recover and if so when?

Many investors are asking the question why is the lithium price dropping at the moment. Shouldn’t lithium prices only be going up given the long-term demand?

Not in the short term. Lithium spodumene prices fetched US$850 per tonne in January 2024, down from US$6,400 per tonne a year earlier. And Pilbara Minerals (ASX:PLS) told investors it received US$804 a tonne in the first 3 months of 2024.

In this article, we look at the questions of:

• Why has the lithium price fallen?
• Will it recover and if so to what extent?

 

Why is the lithium price dropping?

First of all, we think we need to note that the current lithium price volatility is hardly a one-off phenomenon. But to answer the question of why prices are dropping now; it is because EV sales growth in China has slowed in conjunction with the broader Chinese economy. With a glut of supply, prices are falling as demand remains slow at previous pricing levels.

Obviously it is a concern to investors and is bad enough that Core Lithium (ASX:CXO) had to shut down its mine. Nonetheless, this is not the first time there has ever been a glut in the lithium market.

 

Lithium prices are always volatile

Lithium prices tend to constantly be volatile in the short-term, and this can be attributed to a number of factors. Firstly, lithium is a highly specialized commodity that is produced in limited quantities. As such, supply disruptions can lead to rapid changes in the price of lithium.

Second, due to its high demand for use in consumer electronics and electric vehicles, sudden changes in consumer trends can also result in sudden shifts in lithium prices and/or a glut in supply. Shorter-term investors may not remember the lithium price rout that occured in 2019 due to a supply glut

Third, the demand for lithium is also affected by geopolitical conditions and regulations. For example, if a country or region has restrictions on the use of lithium-based products, this can significantly reduce its demand and consequently affect prices.

Fourth, technology advancements have allowed new extraction techniques to be used for lithium mining, which can have an impact on the total supply of the commodity and cause prices to fluctuate.

In summary, while there is a long-term demand forecast for lithium that looks positive, short-term price fluctuations are inevitable due to its specialised nature as a commodity and various other factors such as geopolitical conditions, consumer trends, and technological advancements.

 

But is the long-term forecast still in tact? Should I still consider lithium?

Yes and yes! We’re not saying you should buy any lithium company, but neither are we saying you should write off any any every lithium company.

At the end of the the day, lithium is a valuable commodity and its prices have fluctuated in the past. While there can be volatility in the short-term, investors may still want to consider it for their longer-term strategies. Lithium will be a key part of decarbonisation, particularly for electric vehicles.

The lithium market is also highly globalised, with many countries investing in the development of lithium resources. This has created a more stable market for longer-term investors, allowing them to reap the benefits of long-term price growths over time. Additionally, there are potential investment opportunities in other sectors that use lithium beyond EVs, such as medical equipment.

 

So should I jump into lithium right now?

Not necessarily. And even if you should jump into lithium stocks right now (whether on the ASX or elsewhere), it is crucial to be careful about which individual stocks you pick. Not all will gain as much as others. And of course, it is important for investors to weigh up the short-term risks associated with lithium prices against the potential long-term benefits. Not all will have the risk/reward appetite or financial needs to tolerate short-term fluctuations.

But for those willing to take a risk, investing in lithium can be a worthwhile decision that provides steady returns over time. Knowing where to invest and how much you are comfortable putting at stake can help minimise your exposure to price volatility.

 

When will lithium prices recover?

Some companies have reported prices are recovering. Even the aforementioned Pilbara reported one particular batch sold in March was US$1106 a tonne in March and some for higher in April. At the same time, this is a long way below 2022 levels.

The Australian government’s Department of Industry, Resources and Sciences’ predicts a ‘modest recovery’ in 2024 and 2025, but then forecasts a fall from 2026 as alternative battery chemistries emerge and put price pressure on lithium ion batteries. The forecasts expect lithium spodumene prices to rise to US$1,360 a tonne by 2026 before falling to US$1,090 by 2029.

It is important to note not all lithium is created equal. Higher grade products will attract higher prices. So investors need to specifically consider any lithium company’s product, as well as its portfolio of mines and downstream processing assets.

 

Conclusion

Ultimately, it is up to each individual investor to decide what works best for them and their goals. No matter which way you decide to invest, it is important to remember that price volatility can be expected and will need to be managed. With the right strategies in place, investors may still find success with investing in lithium.

 

What are the Best lithium stocks to invest in right now?

Check our buy/sell stock tips