Categories: Energy Stocks
Topics: Lithium Stocks

Contrarian Buying Opportunity Emerges in Lithium

Contrarians who thought they’d missed out the lithium boom can think again.

If there’s one thing we know about commodity bull markets is that the strongest ones — the ones that really endure — always have what we like to term, “healthy pullbacks.”

And that’s exactly what we’re witnessing today. 

As you can see from the chart below, the price of lithium simply got ahead of itself due in part to the mania surrounding the global EV boom and the immense lithium demand it’s creating.

So far this year, prices of battery metals such as lithium and cobalt — the most important ingredients in EV batteries — have declined around 40% and 50%, respectively. 

Similarly, nickel has lost about 20% of its value this year and is down nearly 50% from its peak in March of last year when it literally broke the market.

Global EV sales, which have been rising sharply the last couple of years, also took a bit of a breather in Q1 as EV subsidies in many European countries, along with China, ran out.  

Yet, that could change in an instant as most developed nations are staunchly committed to transportation, as a whole, going predominantly electric to aid in the reduction of carbon emissions. And subsidies have an important role to play on the demand side of that equation.

Much of what we’re seeing presently in the EV space and in the lithium price can be considered cyclical, and it’s likely we’ll see new EV subsidy announcements across major economies in the coming quarters. 

The US government is showing no signs of slowing down on its commitment to fostering robust EV market growth going forward and currently offers US consumers a tax credit of up to $7,500 for new EV purchases.

The EPA also just proposed the strongest-ever pollution standards for cars and light trucks as a means of accelerating America’s transition to a clean transportation future.  

Through 2055, the EPA projects the proposed standards will avoid nearly 10 billion tons of CO2 emissions — equivalent to more than twice the total CO2 emissions in the US in 2022. 

The standards would also reduce oil imports by approximately 20 billion barrels.

Overall, the EPA estimates that the benefits of the proposed measures would exceed costs by at least $1 trillion.

Depending on the specific compliance pathways automobile manufacturers select to meet the proposed standards, the EPA envisions EVs accounting for upward of 67% of new light-duty vehicle sales and 46% of new medium-duty vehicle sales by 2032. 

That’s, obviously, a gigantic increase from the roughly 7% level we’re at today… and all of those millions of new EVs are going to require battery metals — particularly lithium.

Competition among EV manufacturers is also heating up… 

...so much so that Tesla had to cut prices on many of its Model Y and Model 3 vehicles in the US — for a record sixth time so far in 2023 — to help drive customers away from its competitors and back to its own showrooms. 

Lower prices across the board, plus incentives, also mean increased consumer demand for EVs over the coming years… a trend that will spur upward lithium pricing pressure going forward. 

Automakers saw this coming and are now racing to secure lithium offtake agreements with miners to shore up their own future supply of the key battery metal. 

GM recently announced a US$650 million investment in Lithium Americas, who’s developing the Thacker Pass Lithium Mine project in Nevada.

Lithium Americas estimates that the lithium extracted and processed from the project could support production of up to 1 million EVs per year.

Similarly, Tesla has signed a deal to buy spodumene concentrate, a source of lithium, from the Sayona Mine in Quebec, Canada.

The list goes on and on...

And what it amounts to is a contrarian buying opportunity in select small-cap lithium stocks — many of which have pulled back in recent trading. 

For any successful contrarian investor, it is absolutely critical to understand the difference between “falling anvils” and “healthy pullbacks.”

Our team of experts will get you pointed in the right direction… and the timing could not be any better. 

Mike Fagan
Editor, Daily Profit Cycle