It’s not easy being a lithium enthusiast when the price of the material has dropped by 65 per cent in less than two years and the share-prices of mining stocks exposed to the battery metal have fallen further, and in some case the business has simply collapsed.

But that negative view of lithium is poised to change in the new year with early signs of a bottom forming in the market thanks to a revival in demand for electric vehicles (EV) in a market other than China, which has been the lithium driver, until now.

Europe, according to a significant research report by Macquarie Bank, is picking up the slack left by a sharp decline in demand for EVs in China and, as every investor with an interest in lithium knows, it’s EV sales which determine battery-metal demand.

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The return of European EV buyers appears to be cancelling out the slack created by a sharp fall in Chinese sales after the government in that country slashed financial incentives designed to encourage car owners to make the switch from fossil-fuel power to an EV.

A shift between market drivers is nothing new in commodities with countries regularly swapping places in terms of leadership but what’s interesting with lithium, and a reason to be optimistic, is that it is a commodity starting to enjoy the effects of strong industry and government backing.

It might be early days to predict an industry-wide lithium uplift, if only because there are stalled projects waiting to plug any supply gaps, but if EV uptake forecasts are a guide, 2019 could be lithium’s low point and 2020 the start of a sustainable recovery.

If that forecast is correct then investors exposed to stocks such as Pilbara Minerals (ASX:PLS) (down 77 per cent in less than two years), Galaxy Resources (ASX:GXY) (down 79 per cent over the same time) and Orocobre (ASX:ORE) (down 66 per cent) might claw back some of their losses.

What Macquarie saw in its latest dive into the lithium sector, via a close look at global EV sales, is an industry continuing to grow despite the collapse in Chinese sales.

The bad news first, and that’s largely about China, where EV sales plunged by 47 per cent in October compared with the same month last year, as well as being lower than October 2017, with blame sheeted home to reduced financial incentives for car buyers.

The sharp drop in China had a marked effect on the global EV sales which were down 23.6 per cent year-on-year.

“However, all is not lost,” Macquarie said. “European EV sales are starting to push meaningfully higher on Nordic (Scandinavian) market share gains and as Tesla’s sales lift.

“With a number of EV launches and battery supply chain capacity coming to Europe over the next few months, the European market looks increasingly like the key to the next phase of EV growth.

“Indeed, our new projections see Europe overtaking China in terms of EV sales penetration by 2022/23.”

This “Europe displaces China” theory from Macquarie is a comment on developing trends and will not immediately displace concern about battery metal prices which have been hit hard by China’s EV demand crash.

But a broad view of the global market which incorporates rising European EV demand (such as Norway’s 57 per cent increase in EV sales) produces a surprise estimate that worldwide EV sales are expected to grow by 9 per cent this year, up 1 per cent on the previous sales estimate – even allowing for the China decline.

What becomes interesting for investors in lithium miners, as well as companies exposed to other battery metals such as cobalt, graphite and nickel, is that China is extremely unlikely to maintain pressure on its EV sector because cutting carbon pollution is a national goal.

When, rather than if, China re-stimulates EV production, battery metals miners will stage a recovery, and if that stimulus coincides with continued strength in Europe and an uptick in US demand for EVs, the battery metals business should move out of first gear.

No-one is suggesting a rush back into battery metal stocks, but there is certainly a case for treating the sector as one that is approaching a bottom with the prospect of a significant recovery starting next year and perhaps running for some time.

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