Lithium is one of the metals at the forefront of the electric vehicle (EV) revolution. This means it could experience a surge in demand in the coming years. With that in mind, I wonder if lithium stocks could be a shrewd addition to my holdings with a view to long-term growth and returns. Let’s take a closer look.
Why lithium stocks could be a good option
According to the International Energy Agency (IEA), 8.9 kg of lithium is needed to manufacture each EV. Based on current supply and demand, there is a huge shortage. In fact, analysts believe there is currently a 5,000-tonne deficit in 2022 production alone. This deficit could mean that demand and prices will soar in the coming years as EV adoption rises.
And EV adoption is rising on the back of directives to cut carbon emissions throughout the world. Many existing vehicle retailers have committed to stop producing traditional petrol and diesel vehicles, some by 2030.
A core aspect of my investment strategy has always been to look at the long term. When it comes to lithium stocks and EV demand, the general signs are positive. Over 200m EVs will be on the road globally by 2030, according to the IEA. This is more than 10 times the number seen currently. This should mean demand for lithium will increase exponentially. All of this could be excellent news for lithium miners and potential investors like me.
Risky business
There are two main issues I found when looking at lithium stocks.
Firstly, the process of mining lithium is complex, time consuming, and subject to regulation. A lithium mining project could take up to 10 years from inception to actually mining the metal. Even then, many years could go by before a firm realises that it may not be able to mine lithium to be sold. Finally, like most mining projects, there are strict regulations to abide by. These could hamper progress or even halt a mining project altogether. All these issues could have a negative impact on performance, and investor sentiment.
Next, an issue that is of concern to me right now is the fact that many lithium stocks don’t have much of a track record to view to learn more about them as a business. Many have never even posted a profit. I do understand that past performance is not a guarantee of the future. However, I like to review a business and its past record to help me decide if I should invest.
My verdict on lithium stocks
Overall, I have come to the conclusion that lithium stocks are high-risk. There is the potential for them to be high-reward too, however. But at this time, there are too many unknowns for my liking. This is unsettling for me as a potential investor.
For now, I won’t be buying any lithium stocks, but I will keep a keen eye on developments in the market as well as a couple of specific stocks such as FTSE All-Share incumbent Atlantic Lithium.