Demand for lithium (Li) is skyrocketing as the electric vehicle market speeds up. But lithium inventories are drowning in a flood of new supplies set to reach the market, rather than riding the wave of metal demand.
Albemarle Corp, a producer of the major metals used in electric vehicle batteries. Both (ALB) and Sociedad Químicay Minerade Chile SA (SQM) have been rated as “equivalent weight” by Morgan Stanley based on future uncertainties regarding the price of lithium. Because the supply and demand of metal catch up with each other and adjust over time.
- Lithium is a metal mined from the earth and is traded in the commodity market.
- Lithium is used in the manufacture of batteries found in personal electronics and electric vehicles.
- The surge in demand for electric vehicles could benefit lithium investors.
- Still, the market is seeing an oversupply of lithium that exceeds demand, lowering the prices of lithium producers.
Rapidly increasing demand
Lithium prices have fluctuated significantly over the past few years, and Albemarle and SQM have also shown stock price volatility.
As the demand for personal electronics and electric vehicles grows, the price of lithium will become increasingly important to the price of such consumer products.
Much of the demand comes from electric vehicle manufacturers such as Tesla Inc. (TSLA), General Motors Co. (GM) and BMW, and smartphone manufacturers such as Apple Inc. (AAPL) and Samsung. This rising demand could spur the exploration of new lithium deposits and the surge in the mining industry, and continue to ease Li prices.
Morgan Stanley predicts that new supplies from Argentina, Australia and Chile could add 500,000 tonnes of lithium annually to the market by 2025. This is more than double the current annual supply of about 215,000 tonnes. “We expect these additional supplies to be swamps that predict demand growth,” said one analyst, according to the FT.
If such forecasts are correct, lithium prices could plummet in the coming years, as supply growth could exceed demand. Therefore, the potential for price declines is related to the abundance of lithium in the Earth’s crust. Prices are rising in response to rising demand, making it easier for new producers to enter the market and take action. Most notably, China has begun to develop its own lithium deposits.
For companies like Albemarle and SQM, these are just the economics of producing popular products in highly competitive markets. Everyone else wants to start producing it.