How To Invest In Lithium Stocks
In the past, the only real use we had for lithium was in psychiatric treatment. However, since the electric vehicle revolution and massive growth in the production of lithium-ion batteries, things have changed dramatically. Demand for the universe’s third-smallest atom is at the highest point it has ever been.
In this article, we'll take a look at why buying lithium stocks might make good financial sense and how you can ride this wave to your advantage.
What Is Lithium, and Why Is It The Future?
Lithium is a lightweight metal (only third on the periodic table), and currently one of the most useful raw inputs for technology products on Earth. Recently, we’ve seen spikes in demand for the commodity because of the need for lithium-ion batteries.
Manufacturers are using them for everything, from the construction of electric vehicles to portable power packs. Australian Resources & Investment estimates that supply for lithium carbonate equivalent will jump to 989,000 metric tons in 2023, a 3% increase compared to 2022 estimates.
Currently, the largest demand is coming from the electric vehicle market. Tesla, Rivian, Lucid Motors and XPeng are all putting in vast orders for cells, pushing lithium production capacity to its limits.
Moreover, this trend is set to continue. While battery cell technology continues to evolve, the most exciting new designs, such as lithium-air, still depend on lithium to be present.
What Are Lithium Stocks?
Lithium stocks refer to shares of companies involved in the mining, processing, or distribution of lithium. Traditionally, markets did not treat the metal as a commodity in the same sense as gold, palladium, copper, or oil. As such, it does not have a conventional futures market. However, traders and investors can still get in on the action by buying shares of companies linked to it (for instance, those that mine it or process it for resale).
Many of the world’s largest lithium producers are in parts of the world that specialize in mining, such as Australia and South America. These mines produce either lithium carbonate or lithium hydroxide. That’s why you will sometimes see industry output figures quoting “lithium carbonate equivalent,” which includes both.
Investors are interested in lithium stock because of its potential to perform well in the future. If demand for lithium-containing products continues to rise (as appears to be the case right now), the value of companies operating in this sector should go up. Investors that get in early hope to see the value of their equity grow over the coming decade, as the market keeps expanding.
How To Invest In Lithium
Lithium investing involves buying stocks and holding them long-term in the hope that their value will rise over time.
One of the benefits of a lithium investment is that you have several options at your disposal. You can:
- Invest in commodity indexes. Some indexes link directly to lithium, such as the Solactive Global Lithium Index. These are investment vehicles that track a basket of commodities, spreading the risk involved.
- Invest in lithium ETFs. Exchange-traded funds are pre-packaged products that allow you to buy an assortment of lithium-exposed stocks via a single investment vehicle. Global X Lithium ETF is a popular fund for those trading lithium ETFs.
- Invest directly in lithium stocks. Investing in lithium stocks gives you access to companies directly involved in lithium production, extraction, and distribution. Big names include Livent Corp. and Albemarle Corp., but there are many others.
Traders, on the other hand, don’t invest in lithium stocks and ETFs long-term. Instead, they look for opportunities to profit from the price volatility impacting the sector.
If you do decide to trade, you’ll need to use either a spread betting or “contract for difference” (CFD) account. Spread betting is a type of tax-efficient account that you can use to place bets on the price movements of underlying securities without taking ownership of any physical capital. Here, you’re essentially speculating on what will happen to the price and by what date.
Likewise, CFD traders can also profit from lithium shares without owning the underlying asset. CFDs are just contracts between buyers and sellers that say that the buyer needs to pay the seller the difference between the asset's value upon purchase and the value at the time of the contract. CFD contracts don’t necessarily consider the current value of the asset, only the difference in price between the entry to the trade and the exit.
To trade using either of these tools, you will need to open a trading account on a platform that supports spread betting and CFDs. You will then need to determine your strategy – primarily when you will enter and exit the market.
You’ll also need to understand the risks that you face. Most retail investors who engage in these trading strategies lose money.
Lastly, you’ll need to monitor your positions, putting stop-losses in place if necessary.
Which Lithium Stocks Are Hot In 2023?
So, now that you know what lithium stocks are, which should you actually look into purchasing this year? Here are some of your options.
Livent Corp (LTHM)
Livent Corp is among the most popular lithium stocks in the US. It is an American-owned mining company with operations all over the world. It operates a lithium hydroxide mine in Argentina.
Livent Corp has good relationships with the automotive and battery production sectors. However, it is much more diversified than many other firms, also selling to manufacturers that build lithium-containing pharmaceutical products, for example.
The company currently maintains a good relationship with Tesla and is one of its primary suppliers. When Tesla’s production requirements rise, so too does Livent Corp’s value.
Those looking for non-US market exposure might want to consider Ganfeng Lithium, currently China’s largest lithium supplier with a market cap of nearly $28 billion (considerably more than Livent’s $3.62 billion). Ganfeng primarily supplies raw materials for battery components within China, one of the world's largest markets for EV and home energy packs. Ganfeng is currently benefiting from Tesla’s China operations, supplying lithium directly to the site.
Albemarle is the largest lithium supplier in the world, with a currently estimated market cap of over $25 billion. It supplies Panasonic, a large battery and consumer electronics producer, as well as some automakers.
Investors like Albemarle because of its ability to continue generating profits in a turbulent lithium market. Even though lithium prices are highly volatile, it has been able to generate a consistent stream of profits for its shareholders.
Investors looking for lithium-based mining stocks with high potential are often very interested in Lithium Americans. With a market cap of just $3.44 billion, this firm has a lot of room to grow. What’s more, it is also forging links with legacy automakers, promising to supply them with any lithium they need when they launch their large EV push later in the decade.
As of early 2022, Lithium Americas isn’t producing any lithium. It is partnering with Ganfeng Corp on a lithium mine in Argentina and then hoping to sell to the market in the near future, making it a highly speculative lithium stock.
Lastly, those looking for more Western exposure might want to consider Galaxy Resources. While it has operations in Argentina, it also maintains mines in Australia and Canada. It primarily focuses on the production of lithium carbonate.
What’s exciting for investors is how this company is actively involved in exploration. It is currently searching for new lithium extraction sites that could potentially impact global supplies.
If lithium demand continues to rise at the present rate, lithium stocks are attractive, particularly for long-term investors planning to stay in the market for a long time. Investing in publicly traded lithium companies could offer market-beating returns by riding the current wave of demand, hype, and speculation.
However, investors should be cautious. When buying any capital, it is important to consider the price today as well as what is likely to happen in the future. Many lithium mining stocks are extremely costly compared to their current profitability, suggesting lower returns in the future.
What is the best lithium stock?
The best lithium stock for you depends on your willingness to take risks as an investor. Albemarle and Ganfeng Corp are both highly established and reliable players in the market. However, because their market caps are already high, there is potentially less room for growth. Speculative stocks, such as Lithium Americas, have more room to grow, but are less proven and riskier.
Are lithium stocks overvalued?
At the end of 2021, some influential voices suggested that lithium stocks were overvalued. Albemarle, for instance, was trading at 27 times EBITDA – extremely high for stock in its category.
Will lithium demand go up?
Most experts believe that lithium demand will outstrip supply from 2022 onwards, forcing up prices. Given current technology, lithium is still a necessary input for most high-volume battery cell applications. If demand for grid storage, home battery packs, and electric vehicles continue to rise, lithium prices will too.
What are the best EV battery stocks?
EV lithium battery stocks expose investors to companies that make cells for electric vehicles. Options include Panasonic, Solid Power Inc., Romeo Power Inc., FREYR Battery, and NIO Inc.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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