Lithium is an essential element in the modern world. It is used in a variety of technologies that we rely on every day. So, the demand for it is expected to grow significantly in the coming years due to the transition to clean energy and the increasing use of lithium-ion batteries.
But what is lithium? Basically, it is a soft, silvery-white alkali metal that is the least dense solid element. It is highly reactive and is found in nature only in combination with other elements. It is extracted from brine, spodumene, and other minerals. Nowadays, it is used not only in batteries but also in pharmaceuticals (to treat bipolar disorder and other psychiatric conditions) and in a variety of other applications, such as lubricants, catalysts, and refrigerants. That's why there's no doubt that the lithium market will only grow and gain strength over the next few years.
The lithium market overview
The market is experiencing a supply shortage, wherein the demand consistently surpasses the available resources. Several contributing factors include:
- Escalating Popularity of Electric Vehicles (EVs): As EVs rely on lithium-ion batteries, the demand for these vehicles is projected to continue its upward trajectory in the foreseeable future.
- Widespread Utilization of Lithium Batteries: Beyond EVs, it finds applications in renewable energy storage and consumer electronics, further exacerbating the demand.
- Delays in Expanding Lithium Manufacturing: Sluggish progress in establishing improved reserves and processing facilities has compounded the supply deficit.
The supply shortage is driving up prices. According to S&P Global Commodity Insights, the lithium carbonate price has increased by over 500% in the past year. However, there are some signs that the market will become more loose than in 2022. For example, the price of lithium carbonate has declined slightly in recent months. Additionally, several new lithium processing facilities are expected to come online in 2023, which will help to increase supply.
Criteria for evaluating lithium stocks
When considering lithium stocks, there are several key criteria to evaluate. Let's explore these criteria in detail.
Market capitalization and liquidity
Market capitalization refers to the total value of a company's outstanding shares of stock. Larger market capitalization often indicates stability and the ability to weather market fluctuations. However, smaller companies may have more growth potential.
Liquidity is the ease with which you can buy or sell a stock without significantly affecting its price. It's essential to invest in stocks with good liquidity, as it allows you to enter and exit positions more easily.
Geographic diversification and resource base
Consider where the company's resources are located. A diversified portfolio of lithium assets in different regions can mitigate geopolitical and operational risks. Assess the stability and regulatory environment in the countries where they operate. Don't forget to evaluate the company's resource base, including the size, quality, and accessibility of deposits. A significant and high-quality resource base is often a positive sign.
Technological innovations and partnerships
Investigate whether the company is investing in or utilizing innovative technologies for extraction and processing. Efficiency and sustainability in these processes can significantly impact a company's profitability. Keep in mind that companies that partner with established players in the EV or renewable energy industries may have a competitive edge.
Environmental and ethical considerations
Given increasing environmental and ethical concerns, investors prefer companies with sustainable and responsible practices. This includes evaluating their approach to extraction, water usage, waste management, and compliance with international standards.
Regulatory and political risk
Assess the regulatory and geopolitical risks associated with lithium manufacturing in the regions, where the company operates. Changes in regulations and political instability can significantly impact a company's operations and profitability. For example, new regulations could increase the cost of production or make it more difficult to obtain permits. Political instability could lead to disruptions to the supply chain or even the closure of mines.
Profits and benefits of investing in lithium producer company
Given the growing interest, buying lithium stocks offers several potential benefits and profit opportunities. Here are some of the potential profits and benefits:
- Exposure to the EV boom. The metal is a critical component in the batteries that power electric vehicles. With the global shift towards EVs due to environmental concerns and government incentives, the demand is expected to surge. Buying lithium stocks allows you to capitalize on the expanding EV market.
- Renewable energy growth. Such batteries are widely used for energy storage in renewable energy systems such as solar and wind farms. Lithium stocks can benefit from the growth of renewable energy infrastructure as the world transitions to cleaner energy sources.
- Increasing consumer electronics demand. Lithium batteries are also used in a wide range of consumer electronics, including smartphones, laptops, and wearable devices. As consumer electronics continue to evolve and proliferate, the interest in this metal remains strong.
- Potential for capital appreciation. If you invest in well-performing production companies, their stock prices can appreciate significantly over time. As these companies expand their operations and capitalize on growing demand, shareholders may benefit from capital gains.
- Dividend income. Some established lithium corporations may offer dividends to shareholders. These dividends provide a steady income stream, which is attractive to income-focused investors.
- Long-term investment opportunities. The lithium retail is expected to remain strong in the long term, given the gradual shift away from fossil fuels and towards clean energy solutions. Investing in lithium stocks can be a long-term strategy to capitalize on this trend.
- Technology advancements. Lithium-related technologies are continually evolving. Companies that invest in research and development to improve the extraction, battery technology, and recycling methods may see increased profitability and stock value.
- Strategic partnerships and M&A. Lithium companies may form strategic partnerships with key players in the EV and renewable energy sectors, or engage in mergers and acquisitions to strengthen their positions. Such moves can lead to higher stock valuations.
- Economic growth in lithium-producing regions. Purchasing lithium stocks can indirectly contribute to the economic development of regions with significant resources of this metal. Economic growth in these areas may lead to increased stability and demand for various goods and services.
- Environmental and ethical impact. Some investors seek to align their investments with environmentally responsible and ethical practices. Supporting companies with strong environmental and ethical standards can provide a sense of purpose along with financial returns.
Risks and challenges of investing in lithium stocks
Buying such stocks is an attractive proposition due to the increasing need for it in EVs, renewable energy storage, and consumer electronics. However, like any investment, it comes with its share of risks and challenges. Understanding these risks is crucial for making informed investment decisions. Here's a list of potential risks and challenges associated with purchasing lithium stocks:
- Price volatility. Lithium stocks can be highly volatile. Supply and demand dynamics, geopolitical events, and changes in battery technology can seriously influence the prices. Sudden price swings can lead to significant gains or losses for investors.
- Market uncertainty. The market is relatively new and evolving rapidly. Investing in this market requires a willingness to navigate uncertainty and adapt to changing conditions.
- Geopolitical and regulatory risks. Lithium manufacturing often takes place in geopolitically sensitive regions. Changes in government policies or regulations can impact the supply chain. Investors should monitor political stability and regulatory changes in relevant countries.
- Supply chain disruptions. Disruptions in the supply chain, such as transportation issues or labor strikes, can affect manufacturing and stock prices. Global supply chain vulnerabilities can amplify these risks.
- Competition. The lithium business is becoming increasingly competitive as more companies enter the market. Established players and new entrants may compete for market share, potentially leading to pricing pressure and reduced profit margins.
- Technological advancements. Ongoing technological advancements can change the landscape of lithium and energy storage. Investing in companies that do not adapt to these changes can result in losses.
- Exploration and development risks. Investing in lithium-producing companies carries inherent geological and operational risks, as discovering and developing metal deposits is costly and time-consuming.
- Environmental and ethical concerns. Increased scrutiny of the environmental and ethical aspects of mining can affect a company's operations and reputation. Investors may face risks related to environmental regulations, water use, and responsible mining practices.
- Commodity price fluctuations. Lithium is a commodity, and its price is subject to fluctuations based on global supply and demand. Changes in lithium prices can impact the profitability of companies producing it.
- Currency risk. Lithium companies operating in multiple countries may be exposed to currency fluctuations. Changes in exchange rates can affect revenue and expenses.
Best lithium stocks to buy in 2023
According to NASDAQ, the best stocks to buy in 2023 are as follows.
Albemarle is the world's largest manufacturer of lithium. The company has a strong track record of profitability and is well-positioned to benefit from the growing interest in this metal. Albemarle has a diversified portfolio of lithium assets, including both brine and hard-rock operations. Moreover, the company is committed to advancing its technological capabilities, exemplified by its investments in cutting-edge approaches like direct extraction (DLE), aimed at enhancing cost efficiency and minimizing the environmental footprint associated with lithium manufacturing.
Ganfeng Lithium (GFLIF)
Ganfeng Lithium is the world's second-largest producer of this metal. The company has a strong presence in China, which is the world's largest lithium retail. GFLIF is also expanding its operations into other countries like Australia and Argentina.
Livent is another prominent lithium corporation. The company is notably dedicated to pioneering innovation, actively engaging in the development of novel lithium products and cutting-edge technologies. Livent also holds a distinguished position as one of the globe's foremost producers of lithium hydroxide (LiOH), a high-value product indispensable in the creation of batteries with lithium.
Sociedad Quimica y Minera de Chile (SQM)
SQM, hailing from Chile, ranks among the globe's largest lithium manufacturers. The company boasts a significant footprint in Chile, a prominent player in global production. SQM's extensive holdings encompass diverse assets, including brine and hard-rock operations. The company is further committed to advancing with the times by investing in state-of-the-art technologies, including the promising DLE method.
Lithium Americas (LAC)
Lithium Americas is a development company with projects in Argentina and Nevada. The company's flagship project is Thacker Pass in northern Nevada. Thacker Pass is one of the largest lithium deposits in the world and is expected to produce lithium carbonate and hydroxide. The company has a strong portfolio of projects and is backed by an experienced management team. Lithium Americas is also working to develop new technologies to reduce the cost and environmental impact of lithium production.
But as you can guess, it's not the whole lithium stocks list. There are other potential breakouts on the lithium retail. So here are a few of them.
Allkem, headquartered in Australia, ranks among the foremost global producers of LiOH. The company holds a significant presence in Australia, renowned as one of the world's foremost lithium-producing nations. Allkem is also a prominent figure in the realm of lithium brine production, extracting this valuable resource from subterranean brine deposits on a global scale.
Pilbara Minerals (PLS)
Pilbara Minerals, an Australian enterprise, stands out as one of the global leaders in spodumene concentrate production, a crucial raw material in the manufacturing process. With a history of powerful profitability, Pilbara Minerals is strategically poised to reap the rewards of the growing demand. The company maintains a diversified collection of spodumene assets and is actively engaged in the development of cutting-edge technologies like DLE to stay at the forefront of the industry.
Sigma Lithium (SGML)
Sigma Lithium is a Canadian development company focused on sustainable lithium creation. The company's flagship asset is the Grota do Cirilo project in Brazil, one of the world's largest, highest grade, and lowest cost hard-rock lithium deposits. Overall, it is a high-risk, high-reward stock with a lot of potential. But keep in mind, SGML is a pre-production company, which means that it does not yet generate any revenue. This makes the stock more risky than established lithium producers. Additionally, the company is facing challenges in developing its Grota do Cirilo project, including delays in obtaining permits and rising costs.
Piedmont Lithium (PLL)
Piedmont Lithium is a mining company developing two projects in North America: the Carolina Lithium Project in North Carolina and the Quebec Lithium Project in Quebec. The company is also developing a LiOH conversion facility in Gaston County, North Carolina. As SGML, it is a pre-production company. So, it has all the potential to break out but involves high risks.
Future outlook of global lithium industry
The future outlook for this industry is positive. The demand for lithium is expected to grow significantly in the coming years due to the transition to clean energy and the increasing use of batteries with lithium in electric vehicles, consumer electronics, and other applications. According to a report by McKinsey & Company, the lithium market is expected to grow by more than 30% annually from 2022 to 2030, reaching a value of over $400 billion. The report also states that the global lithium supply will double by 2030 to meet this demand.
The key trends that are expected to shape the future of this business include:
- Growing demand from the EV sector. The EV sector is the largest and fastest-growing source of demand for lithium. In 2022, EVs accounted for over 60% of global demand. This share is expected to increase in the future as EV sales continue growing.
- Increasing investment in manufacturing. Investment in lithium production is increasing as companies seek to capitalize on the growing demand. However, it takes several years to develop improved lithium mines and processing facilities, so this investment is unlikely to ease the supply crunch in the near term.
- Development of innovative technologies. Companies are developing new technologies, such as direct lithium extraction (DLE) and lithium recycling. These technologies help to increase supply in the long term.
- Focus on sustainability. The industry is under increasing pressure to reduce its environmental impact. As a result, companies are developing new technologies and processes to reduce the amount of water and energy used in lithium manufacturing.
Nevertheless, no matter what stock you choose, you should consider your risk tolerance and investment goals before investing. Lithium stocks are volatile, and there is always the risk that the market will change. However, for investors who are willing to take on some risk, lithium stocks will be a rewarding investment opportunity.