Lithium stocks are getting a huge amount of attention right now all around the world and it’s easy to see why. Lithium is a key material in electric vehicle (EV) batteries and with the EV industry growing rapidly, demand for the commodity is surging.
Are lithium stocks a ticket to riches though? Or is this a hyped-up growth story I should avoid? Let’s discuss.
Are lithium stocks a good investment?
To my mind, there’s certainly a chance that lithium stocks could deliver attractive returns for me in the years ahead.
Right now, supply just can’t match demand due to the EV boom and this has pushed lithium prices up significantly. Today, the price of lithium carbonate is around CNY480,000. This time a year ago, it was about CNY100,000.
Experts expect the supply gap to remain in place for a while. “In the next two years, even though there will be significant growth in supply, it will be less than demand, so the gap will just continue to grow,” said Joe Lowry, President of Global Lithium LLC (who’s actually known as ‘Mr Lithium’) recently in an interview with Bloomberg.
Looking further out, the fundamentals remain strong. According to the International Energy Agency (IEA), there could be over 200m EVs on the road globally by 2030 – more than 10 times the number today. This is likely to boost demand for lithium significantly. Indeed, the IEA estimates that the strong growth of the EV market could see lithium demand increase by up to 40 times by 2040. This sounds very promising for companies that mine the commodity.
No guarantees
Having said all that, there’s no guarantee that lithium stocks will turn out to be good investments.
One major issue to be aware of here is that lithium mining is complex. It takes about 10 years to bring a new mining project to life and there’s a lot that can go wrong. It’s quite common for companies to experience setbacks. For example, Piedmont Lithium’s key North Carolina project (which is set to be one of the largest lithium projects in the US) has recently been held up by regulatory issues.
Another issue is that a lot of lithium miners don’t have any profits (some don’t even have any revenues). As a result, it’s hard to value them. So, their share prices can be extremely volatile. Atlantic Lithium, which is listed on the London Stock Exchange, is a good example here. In mid-April, it was trading around the 65p mark. By late July, however, it was near 30p.
It’s also worth pointing out that after such a large rise in the price of lithium, there’s always the chance that the price of the commodity could experience a significant pullback. This could potentially have a negative impact on lithium stocks.
Should I invest in lithium stocks?
Putting this all together, my view is that lithium stocks are generally high-risk, speculative investments. The growth story linked to the EV market does sound attractive. Yet profits, and share price gains for investors, are far from guaranteed.
Given the speculative nature of lithium stocks, I won’t be buying any for my own portfolio. Ultimately, these stocks are just a little too risky for me.