The economic clouds are gathering and the UK is already in recession. That is the conclusion of experts including the Bank of England. That will be bad news for some shares — but not necessarily all of them. I have been thinking about what sorts of shares I could own in my portfolio that might ride out a recession. For example, demand for electric vehicles looks set to keep increasing. So I think the lithium used in many batteries could see sustained demand even in a downturn. Might now be a good opportunity for me to stock up on lithium shares?
Long-term growth prospects
The long-term outlook for lithium demand is strong. McKinsey forecasts that demand for lithium carbonate equivalent is expected to increase up to eightfold between last year and 2030.
To feed that demand, a number of things need to happen. Existing mine operators like Ganfeng Lithium need to increase production, new entrants need to start mining — or both.
A recession could lead to a slowdown in growth, for example because consumers have less disposable income to spend on new electric vehicles. But the long-term trend seems clear and I expect global lithium demand to rise even in a recession.
Choosing winners in an emerging industry
However, when it comes to the fortunes of individual lithium shares during a recession, I think the outlook is less clear-cut.
The sort of growth potential McKinsey projects for lithium could attract a host of new firms keen for a slice of the pie. That may lead to price competition, pushing down profitability.
On top of that, mining is an industry that typically requires a lot of capital investment even before commercial production begins. So companies can burn through money and end up having little to show in return, for example if falling prices make a mine economically unviable.
Some lithium shares have been doing well lately. Atlantic Lithium, for example, has more than doubled in the past year.
But is that a foretaste of what is to come during a recession, or not?
Why I’m not buying lithium shares
I think some lithium shares could do well even and help my portfolio power through a recession. But the key question is: which ones?
I think the answer is unclear. So, based on my investing principles, I have decided that now is not the time for me to buy lithium shares. I like business models that are proven. Generally I also prefer to invest in companies that have a competitive edge within such a proven business area.
Sometimes I make an exception to that, for example, within an industry that is in an early growth phase. Lithium is in such a phase. But, as the wide range of lithium shares available globally demonstrates, the industry has attracted a lot of new entrants. The long-term profitability prospects for most miners remains unclear.
Although lithium demand is expected to rise strongly, a recession could make exploration funding scarcer. That may make it harder for some mining companies to survive until they reach commercial production. It could also push down selling prices. In a recession I would prefer to focus on already profitable companies operating in industries with proven demand and economics. For now at least, I will not be buying any lithium shares.