Lithium gets a charge, but oversupply still looms
Summary
The metal, which is used to make batteries for both gadgets and electric vehicles, has been on a roller-coaster ride in recent years.
Lithium may be called “white gold," but investing in the metal has hardly been a golden ticket lately.
Lithium, which is used to make batteries for both gadgets and electric vehicles, has been on a roller-coaster ride in recent years. Its price skyrocketed in 2021 and 2022, only for a subsequent plunge to wipe out all those gains. Lithium prices are now down nearly 90% from their peak in 2022.
Rising adoption of EVs, especially in China, has pushed up demand, but supply has been ramping up even faster. That, together with slowing EV sales outside of China, has pushed lithium prices down.
No wonder investors got excited when there were unconfirmed reports last week that China’s battery giant Contemporary Amperex Technology, or CATL, suspended production at one of its lithium mines. UBS said the mine represented around 5% of global supply.
According to domestic Chinese media, CATL didn’t confirm the suspension but did say that it is making adjustments to its production. Lithium futures traded in China have risen around 4% since the reports last week while shares of lithium miners around the world have also surged. U.S.-based Albemarle has jumped 14% while Australia’s Pilbara Minerals has gained 19%. Their stocks are still way down from their peaks in 2022.
With prices having dropped so low, supply cuts seem inevitable as producers are making little profits or even losses. UBS, for example, estimated that current lithium prices are already lower than CATL’s cash cost for production. Of course, since CATL is an integrated battery maker, it might have more tolerance for losses on one part of its business. But overall, prices shouldn’t go much lower from here if global production is to remain economical.
Still, don’t expect a strong rebound in lithium prices either. Inventory of lithium carbonate, a lithium-based compound used in batteries, in China is still at a historical high level of 130 kilotons, according to J.P. Morgan. And more supply could be coming online, especially if prices start to rise again. Goldman Sachs estimated that supply next year could be 57% higher than demand. Compared with the previous downturn between 2018 and 2020, Chinese lithium producers have more cash, according to UBS, which means they could continue with their expansion plans.
The worst may be over for lithium stocks, but don’t expect a strong rally just yet.
Write to Jacky Wong at jacky.wong@wsj.com
