The Lithium Problem

Brit Ryle

Posted October 18, 2023

Things just got ugly for lithium stocks. Bank of America (NYSE: BAC) just downgraded the entire sector due to a potential lithium oversupply expected to hit in 2024. 

Sociedad Química y Minera de Chile (NYSE: SQM) and Albemarle (NYSE: ALB) are the biggest lithium miners and processors on the New York Stock Exchange. SQM is down 4% as I write and ALB is down nearly 10%.

Albemarle is now at a 2-year low. 

Sadly, this doesn’t appear to be a “buy the dip opportunity.” Even though today’s beatdown has pushed Albemarle’s forward Price-to-Earnings ratio down to around 6, if lithium prices can’t recover, the stock won’t either. 

Albemarle is already expected to earn less in 2024 than it will by the time the final numbers are in for 2023.

And there’s not much reason to expect a recovery for lithium prices in the near future. 

At this time last year, lithium sold for $66,000 per metric ton. Today a metric ton of lithium will run you about $27,000. It is not demand that’s the problem – lithium demand is forecast to grow ~20% a year for the next 6 years at least. And yes, the vast majority of that demand is coming from expected electric vehicle (EV) sales. 

One of the reasons that Tesla has been able to cut prices for its EVs this year is because lithium prices have fallen so far. 

On its last earnings conference call, Albemarle said its expansion plans will triple its lithium output by 2027. Demand is strong. And with lithium prices falling so low, EV companies will be scrambling to lock in long-term supply – which means there is even less reason to expect an imminent reversal for lithium prices. 

Over the long-term, yes, it is likely that weak lithium prices will curtail investments in new production, thereby bringing supply and demand into better balance. But that won’t happen overnight, especially since a company like Albemarle sells its future production ahead of time. It has contractual obligation to meet and it can’t “sorry, we’re not going to mine and process enough lithium to meet our obligations.”

Now I know – I recommended Lithium Americas (NYSE: LAC) on September 9, at $17.780 a share. Lithium Americas spun off its South American operations into a separate company and stock – Lithium Americas Argentina (NASDAQ: LAAC) – on October 4. Combined value for both is currently right at $15. 

I hate to pull the plug on this one and take the loss, but that’s what I’m going to do. Because my concern is that a sustained downturn for lithium prices will change the viability of LAC’s Thacker Pass lithium mine. LAC is a developmental stage company, valued almost entirely on the future of the Thacker Pass mine. Anything calls that into question, the stock could head a lot lower. 

So, sell your shares of Lithium Americas (NYSE: LAC) and Lithium Americas Argentina (NASDAQ LAAC). 

Is EV Demand Slowing? 

I’ve already seen plenty of commentary that weak lithium prices are the obvious result of weak demand for electric vehicles (EV). 

But is that really the case? Is demand for EVs really faltering? It depends on who you’re asking…

Various polls tend to always find a significant number of people who say that absolutely will not buy an EV (~25%) or are very unlikely ~15% seem compelling. Other polls that say that ~50% are considering a new or used EV seems like a strong counterpoint. ..

Ask Ford why it cut a shift at its Detroit F-150 Lightning EV truck factory, and they’ll say We are adjusting the schedule… because of multiple constraints, including the supply chain and working through processing and delivering vehicles held for quality checks after restarting production in August…”

Pose the same question to the Wall Street Journal and they might cite a memo from a UAW official that says “It doesn’t take a rocket scientist to figure out that our sales for the Lightning have tanked…” 

Or, you could just look at numbers. There were 762,883 EVs sold in the U.S. in 2022. This year, the total should be over 1.1 million. That’s better than 50% year over year growth…

One thing’s for sure – any pessimism about EV sales will send EV maker stock prices lower. Yes, I’m talking about Fisker (NYSE:FSR) and Rivian (NASDAQ: RIVN) – again…

And while I’m on “stock prices lower,” it sure looks like the S&P 500 wants to head lower…

Here’s the 3-month chart for the S&P 500. The horizontal red line at 4375 is a pretty clear support/resistance point. The S&P 500 was trying to break over that resistance point and fill the gap after the last Fed meeting on September 20 – indicated by the purple arrow…

Didn’t happen. The S&P 500 just failed to break above resistance and that sets up a probable test of the next support level for the S&P – the 200-day moving average (MA) that currently sits at 4,229.

Wish I had better news…but that’s what I got for you today. Take care and I’ll talk to you on Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today.