Will lithium prices recover? Is there hope for a new bull market in FY25?

Many investors are asking the question: Will lithium prices recover? After the past 18 months, investors have accepted that the surge in lithium prices between 2020 and 2022 was an over-rally and it was due for a correction. But 18 months into this correction, lithium prices are below prices that many companies project’s profitable.

Lithium spodumene prices fetched US$6,400 per tonne in January 2023, and US$850 barely 12 months later. Ouch.

In this article, we look at the questions of:

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

 

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 have dropped, well obviously they over rallied in the first place. But the correction was so significant because EV sales growth around the world. It all began in China where sales slowed in conjunction with the broader Chinese economy as it finally emerged from pandemic isolation. But with high inflation and rising interest rates, this spread across the world. 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 companies like Core Lithium (ASX:CXO) had to put pause on their plans for production – CXO shut down its mine barely a year after it commenced production. Adding insult to injury was the fact that 2023 finished up a mostly positive year for global equities – except of course lithium stocks.

 

At least I’m not a 🌈🐻?
byu/Pjp2- inwallstreetbets

 

Nonetheless, this is not the first time there has ever been a glut in the lithium market, nor where lithium stocks have declined while the rest of the market did well.

 

Lithium prices are always volatile

Lithium prices are constantly volatile in the short-term, and this can be attributed to several factors but they all come down to supply-demand dynamics. Lithium is a highly specialised commodity that is produced in limited quantities. As such, supply disruptions can lead to rapid changes in the price of lithium. Sudden changes in consumer trends can also result in sudden shifts in lithium prices and/or a glut in supply. This is most relevant in the current lithium market, and it is not even the first bear market where this is so. Shorter-term investors may not remember the lithium price rout that occurred in 2019 due to a supply glut.

Also, as is the case with demand for most other commodities, geopolitical conditions and regulations also have potential to have an impact. 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.

 

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 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.\

 

Just when will be the right time to buy lithium stocks?

For all investors, bulls or bears, we recommend holding off until the end of August 2024, by which time several ASX lithium stocks may have given guidance for FY25. Bullish sentiment among them may lead to a bull run on lithium stocks, even before prices recover substantially. By bullish sentiment, this may not necessarily comprise of the companies predicting prices to surge in FY25. Perhaps some may just announce timelines for ramping up production to support higher prices, or even re-opening mothballed mines in the case of companies like Core Lithium that halted production altogether.

After that, we would like to see companies consistently selling lithium spodumene at US$1,300/t. Obviously there is a risk that prices could fall further, or perhaps just ASX lithium stocks. Goldman Sachs released research earlier this month showing that the ASX lithium sector has actually outperformed its global peers, with an average decline of 25% vs a 35% decline globally. And it reckons that lithium stocks are pricing in US$1,100/t right now, so many stocks are fairly valued. It named Arcadium Lithium (ASX:LTM) and Core Lithium (ASX:CXO) as the most sensitive to lithium prices.

 

When will lithium prices recover?

It’s anyone’s guess. It is worth noting that some companies have reported prices are recovering, although prices have a long way to go to reach 2022 levels.

The Australian Government’s Department of Industry, Resources and Sciences’ predicts a ‘modest recovery’ across 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. Goldman Sachs predicts prices to stagnate with US$800/t in 2025, followed by US$978 in 2026 and US$1,115 in 2027.

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.

Turning back to Goldman Sachs estimates, and the bank expects good growth for lithium hydroxide, with prices bottoming out at US$11,463 this year but growing to US$16,146 by 2027, as well as for lithium carbonate, with growth from US$11,673 in 2024 to US$15,646 in 2027. Unfortunately, this won’t help too many lithium stocks on the ASX, given they are mostly lithium spodumene. Two exemptions might be IGO (ASX:IGO) and Piedmont (ASX:PLL) given these stocks are in lithium hydroxide.

 

Conclusion

Ultimately, where lithium prices are headed is anyone’s guess. So 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.

But as a bare minimum, we recommend investors hold off investing in any stock until the end of August 2024, when many companies will have given outlooks for FY25. Thereafter, investors should look for companies in the higher-margin lithium hydroxide and lithium carbonate sectors, rather than those that are just exploring for or producing spodumene.

 

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

Check our buy/sell stock tips