Why is the lithium price dropping? Is the long-term demand outlook still intact?

Nick Sundich Nick Sundich, January 29, 2024

Many investors are wondering why 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.

In this article, we look at the question of why this is happening.

 

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.

 

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! 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 globalized, 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 minimize your exposure to price volatility.

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

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