Is the sun coming out for lithium stocks?
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Oversupply fears have seen investors flee from lithium stocks this year, but “some sun is beginning to poke through the clouds” according to a report published by Seeking Alpha.
About 75 per cent of the ASX’s 100-or-so lithium stocks have slumped between 2 per cent and 90 per cent in the past six months (see table below). And key lithium stocks have seen further falls this month.
There are three key reasons for the slump, according to the Smart Dividend Stocks report published by Seeking Alpha:
— “Out-of-control” valuations
— China’s decision to cut back on subsidies for vehicles with a driving range of fewer than 300km
— Capacity expansions in Chile and new supply coming online in Australia flooding the market
Looking ahead, however, oversupply fears could ease as demand increases from electric car and battery makers.
“Today global production is sub-250,000 tonnes and by 2025 most analysts estimate we’ll be needing at least 750,000 tonnes,” the report says.
“Every year that analyst number has been moving higher — just a few years ago consensus 2025 demand was closer to 400,000 tonnes.
“Some are predicting the market will be as big as 1 million tonnes by 2025… And we can see it will need to be about twice as big just five years later.”
Still, new supply should take care of even that level of demand.
Major lithium producers Albemarle and SQM are expanding production and Pilbara Minerals (ASX:PLS) recently brought its massive Pilgangoora lithium and tantalum project in Western Australia’s Pilbara region into production.
Altura Mining (ASX:AJM) has also started producing lithium concentrate from its mine, also in the Pilbara.
New production is expected to force supply up from around 1.1 million tonnes in FY18 to over 3 million tonnes in FY19.
However, we may see a bottleneck as China scrambles to ramp up its conversion capacity, according to Chris Reed, the boss of junior lithium producer Neometals (ASX:NMT).
“The bottleneck will be in China in terms of their conversion capacity,” he told Stockhead.
“You’ve got the biggest expansion in the lithium business in its history, in terms of batteries, converting plants, all that sort of stuff. I think there is probably a disconnect.”
With valuations of lithium stocks falling back to earth, that could mean opportunities may be ready to emerge.
Here’s a list of ASX stocks with exposure to lithium courtesy of leading ASX data provider MakCorp: (Prices from August 14)