I’ve seen it happen with so many niche commodities - potash, graphite, antimony, rare earth metals, cobalt, vanadium - and I am pretty sure it is happening again.
There is some substance you’ve barely heard of. Suddenly, it’s essential to some new technology which is going to save the earth in some way, but nobody’s producing it.
Why is nobody producing it, if it’s so essential? Because prices are so low.
Prices then start going up, because everybody wants it and nobody’s producing it.
Suddenly, a load of natural resource companies which aren’t going anywhere, especially in Canada and Australia, “change their focus” and “pivot” They start exploring for said commodity. Some of them acquire half-explored development projects and re-drill them.
Investment capital piles in. Some of the above companies actually make discoveries that start producing. Existing producers up their output.
Within a few years, there is a surplus of said commodity, where once there was a shortfall, and the price comes back down again. The bigger the previous rocket launch, the bigger the subsequent crash.
Those companies that aren’t profitably producing hit the skids. Those that are have to tighten their belts. The bull market has morphed to bear.
Nothing fixes high commodity prices like high commodity prices runs the adage.
If you can time these cycles well, you can make a great deal of money. But you can also lose a lot of money.
The bull market in an essential commodity bursts
I think we are seeing one such turn right now in lithium. Perhaps even in the broader battery metal space.
Fossil fuels are destroying the planet. Electric vehicles are the answer. But they need lots of lithium? Yes. Who makes lithium? I don’t know. But the price is going up. Quick, let’s invest in lithium. Let’s start a lithium company. Lithium is going to save us. Tesla can’t get enough lithium. Tesla’s going to buy a lithium company. Lithium, Tesla, EVs, Net Zero, Climate Change, BUBBLE!!!
Much as I love niche commodities for these repeating cycles they display, I’m afraid I missed the lithium bubble. I didn’t catch the early phases of the bull market when it had a good run in 2016 and 2017.
In 2018 and 2019 the lithium companies had a miserable time, and I felt somewhat vindicated. But after the Covid lows of 2020, they exploded - I missed that one too, as I was away with other commodities.
I felt I was too late to join the party. I clicked my tongue as the price went up without me. I clicked my tongue even more as the bull market went on for longer than I thought it would . I then watched with a certain amount of confusion as the companies pulled back while the price of lithium carbonate kept on rising. That’s not normally a good sign.
In any case, now the price of lithium carbonate has stopped rising. In just a couple of months, it’s lost over 30% - having risen tenfold.
Here’s the price action since 2017.
And here is the Global X Lithium ETF (NYSE:LIT) - the lithium companies - over the last ten years.
Supply up, demand down
Lithium is not actually that hard to produce. Many of the problems are regulatory. But there was a frenzied rush by electric vehicle makers to secure supply over the past two years, which sent lithium prices to the moon.
Whoever could get producing first would win the race to secure contracts. The slower movers would suffer.
Then late last year China announced it would halt subsidies for the $87 billion industry.
Demand for electric vehicles dropped, just as lithium supply started coming on-stream. There is now a lot more supply on its way from China, Chile, Australia and North America and that is only going to send prices one way. Australian supply alone is set to rise by 32% this year.
Lithium giant Albemarle (ALB.N) has said the lower car sales are a “temporary weakness”, given the early Lunar New Year in China. I’m not buying it.
As my buddy, asset manager Simon Catt of Arlington Capital, alerted me in an email yesterday, the AUD$12.5bn market cap, Aussie producer, Pilbara Lithium (ASX.PLS) announced last week that their latest shipment of 15,000 tonnes of 6% spodumene concentrate was unpriced. “UNPRICED! Hold the phone,” he cried.
Chinese battery giant CATL, the largest Chinese battery manufacturer, is selling its batteries at little more than cost to automakers. The discount includes an assumption that prices of lithium carbonate would fall by over 50%.
“Lithium - First Leg Lower”
Goldman Sachs just put out a report titled, “Lithium - First Leg Lower”, noting much of what I have just said and more.
Chinese lithium demand is down 52% versus the three-month moving average, while production is unchanged. Prices “have more room to fall before spot demand recovers, in our view.” Goldman notes the end of subsidies, falling EV sales, falling spot prices, falling demand from EV battery production, and rising EV inventory putting a further dampener on demand and rising supply from China and Chile.
It would seem the battery wheel is come full circle, if I may misquote the great man.
This is not the end of lithium demand, nor the end of the electric vehicle. Both will play an enormous part in our futures. But my hunch is that this is the end of a two-year bull market that saw lithium carbonate and spodumene up many times over.
Supply can now meet demand. The market has solved the problem in the market. Now the market has another problem: falling prices. It will solve that too. And so the commodity cycle turns.
West Eng gig alert! This May, wearing my comedy hat, I’ll be coming back to Crazy Coqs in Brasserie Zedel for another night of “curious comedy songs”. That’s this May 7th. Please come if you’re in town. They are super nights.
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This article first appeared at Moneyweek.