Lithium has long been considered a highly sought-after commodity, particularly due to the growing demand for electric vehicles worldwide. However, despite this promising outlook, the stocks associated with lithium have been suffering in the market.
The perplexing performance of these stocks has caught the attention of Wall Street analysts. In a recent report, Evercore ISI analyst Stephen Richardson raised the question, “What’s up with lithium stocks?”
Indeed, the situation is worth examining. For instance, shares of the lithium mining company Albemarle (ticker: ALB) reached a 52-week low last week, and their value has continued to decrease further on Monday. Similarly, Livent (LTHM) shares concluded Thursday at a 52-week closing low. Over the past year, both companies have experienced substantial declines of approximately 36% and 41% respectively. This is in stark contrast to the significant gains made by the S&P 500 and Nasdaq Composite, which have risen approximately 18% and 22% respectively during the same period.
Lithium serves as a vital component in the batteries that power electric vehicles, including Teslas. However, the struggles faced by Albemarle cannot be attributed to a decline in electric vehicle sales. On the contrary, data from car registration trackers and Citigroup indicate that EV sales are on an upward trajectory, having increased by roughly 33% year over year in the U.S., Europe, and China combined.
One simple explanation for the weakness in lithium stocks lies in falling commodity prices. Benchmark lithium prices have plummeted approximately 67% over the past year and are currently hovering near a 52-week low of about $24,000 per ton.
But why are lithium prices down when there is such strong demand for electric vehicles? One possible reason is an increase in commodity supply. However, Richardson is skeptical about this theory and notes, “It is hard to believe incremental supply is coming at what is likely closer to marginal cost today,” indicating his doubts about the validity of this explanation.
In conclusion, the underperformance of lithium stocks remains a puzzle in the market. Despite soaring demand for electric vehicles, falling commodity prices and questions regarding the increase in supply have contributed to the struggles faced by companies like Albemarle and Livent. As investors continue to grapple with these issues, the outlook for lithium stocks continues to be uncertain.
Inventories and Battery Demand
Inventories have played a significant role in shaping the current battery market. During the first half of 2023, destocking was the dominant trend, leading to a slowdown in buying by battery makers and electric vehicle (EV) companies. This has been especially evident in China, the largest producer of EVs and EV batteries. With buyers hesitant to make purchases, the market sentiment towards China has become increasingly bearish.
However, there may be a glimmer of hope on the horizon. Historical patterns suggest that cathode and cell makers delay restocking until they have a clearer picture of future prices. As a result, there may continue to be a lull in demand until closer to the end of 2023 when the annual buying pattern typically improves.
Buyers in the battery market tend to wait for falling prices before making their purchases. After all, why buy today when prices are expected to decline further tomorrow? This caution could be alleviated in the coming weeks as companies begin ordering materials for 2024, potentially leading to a reversal in price trends.
Looking specifically at Albemarle, an analysis suggests that its shares are a worthwhile investment, with a Buy rating and a $280 price target. Although Albemarle stock has seen a 1% decline to $166.49 in Monday trading, it outperforms the broader market represented by the S&P 500 and Nasdaq Composite, both down approximately 0.3%.
In fact, about 81% of analysts covering Albemarle stock recommend buying shares, reflecting confidence in its future prospects. This figure exceeds the average analyst Buy-rating ratio of around 55% for stocks in the S&P 500. The average price target set by analysts for Albemarle is approximately $263 per share.
Livent, another player in the industry, also garners positive attention. An analyst rates its shares as Buy with a $38 price target. Similarly, approximately 79% of analysts covering Livent recommend buying its shares, and the average price target stands at approximately $32 per share. In Monday morning trading, Livent stock experienced a slight dip of 0.5% to $17.61.
In conclusion, while inventory dynamics have contributed to the current market conditions, the prospect of increased battery demand remains on the horizon. Understanding buyers’ behavior and their preference for favorable pricing patterns will be crucial in navigating the market.