Lithium has started coming back after a 'freefall' in China. What to know about the investing landscape

Published Wed, May 17 20231:40 PM EDTUpdated Wed, May 17 20232:21 PM EDT

Investors should focus on the long-term story in the lithium investing landscape, not the volatile price swings seen in recent months. Prices for the chemical used in electric vehicle batteries have rallied to about $28,000 per ton in China, after plunging 70% to low of $22,000 per ton over the past five months, according to Citi analyst Shreyas Madabushi. "Lithium carbonate (Li2CO3) prices in China are no longer in freefall and appear to have bottomed out," he said in a note to clients Tuesday. What's driving that relief rally? On top of improving sentiment and lower inventories in China, Citigroup said there's shrinking supply of the industrial carbonates. Export arbitrage, by which the same asset is bought and sold in different markets at different prices, has also played a part. Prices should go higher in the second half of the year given improved buying interest and restocking within the supply chain. Madabushi set a price target of $32,000 per ton — about $10,000, or 45%, off the low seen in recent months — over the next three months. Moves in China are driving changes in the global market for lithium as demand for electric vehicles increases, said Keybanc analyst Aleksey Yefremov. Despite the volatile price swings, some still point to what they see as a broader story around stocks tied to lithium. Here's what to know: Lithium suppliers Albemarle is the biggest name in the sector with a market cap of more than $24 billion. That's still relatively small, with the market cap representing about one half of Lululemon 's and a tenth of Abbvie 's. Still, Bank of America analyst Matthew DeYoe noted Albemarle is a diversified way to play lithium trends. He also said the company is one that can actually grow with the market, which is a challenge for other mining and resource stocks. "It's kind of like an ETF" for the entire sector, he said, adding that Albemarle's balance sheet is strong and it's large enough to trade into and out of easily. Keybanc's Yefremov upgraded Albemarle to overweight last week, noting the company "owns world-class resources at the bottom of the cost curve, and is well positioned to nearly triple 2023 lithium production over the next decade." His price target of $270 implies the stock could rally 31% from where it finished Tuesday. The upgrade puts him in the majority on Wall Street, with nearly three out of every five analysts rating the stock as buy or an equivalent, according to Refinitiv. The average analyst expects the stock will rally 27% over the next 12 months. Keybanc also upgraded Livent , a smaller name with a $4.5 billion market cap, to overweight. Yefremov said the company is on track to expand volume through an increase in lithium offerings. And the company, which announced an all-stock merger with Alkem earlier this month, has less downside risk in its contract portfolio, he said. ALB LTHM YTD mountain Albemarle and Livent Livent, which has rallied more than 25% this year, is also popular on Wall Street. Nearly four out of every five analysts rate the stock a buy, with the average analyst expecting shares to rally another 30% in the coming year. Yefremov also expects the stock to exhibit more upside, but forecasts a more modest advance of about 21% in the next year. Other lesser-known names have also made waves in recent months. DeYoe reiterated his buy rating on Canadian producer Sigma Lithium earlier this month, calling it "the next big thing in lithium." The stock has rallied nearly 50% this year and notched a new 52-week high Wednesday. And investors looking for an actual ETF have a list to choose from. Among the biggest names: Global X has a Lithium & Battery Tech ETF , Sprott has a Lithium Miners ETF and Horizons Global has a Lithium Producers Index ETF . LIT LITP,HLIT-CA YTD mountain Some of the ETF options Electric vehicle makers Electric vehicle makers typically rely on lithium for automobile batteries. Given lithium is such a small market, Wells Fargo analyst Colin Langan said it will be less of a story about which automakers can get cheaper lithium and more about who can simply get enough to support increased car production goals. Experts expect demand for electric vehicles to grow dramatically in coming years, given the impacts of the Inflation Reduction Act and efforts to decarbonize the economy from fossil fuels. Last month, the EPA proposed new tailpipe emission limits that could require as many as two-thirds of new vehicles sold in the U.S. to be completely electric by 2032. "That's going to be quite a challenge, if we don't literally right now start digging up and finding sites for lithium," Langan said. In this environment, Tesla , GM and Volkswagen are best positioned because they were early EV adopters and have built relationships over a longer term, Langan said. Tesla has surged this year, while GM and Volkswagen have slid. (Wells Fargo carries an underweight rating on GM for other reasons, though the majority of Wall Street has a buy rating on the stock, according to Refinitiv.) Langan said smaller names and start-ups could struggle, as high-growth aspirations can be challenged by a skewed supply-and-demand curve. While EV makers have tried to look to other chemicals as an alternative, Langan said lithium is presently still the best choice. But eventually, "it puts more pressure on those sort of nascent startups," he said. "That's going to be a concern." — CNBC's Michael Bloom contributed to this report