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Look to Lithium's Bright Long-Term Future

Getting past near-term growing pains and uncertainty, we see significant risk-adjusted upside.

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Lithium prices have plummeted over 50% since their early 2018 high as new supply has rushed into the market. The shares of Albemarle (ALB), SQM (SQM), and Livent (LTHM) now trade well below our fair value estimates as they price in lower-for-longer lithium prices. Low prices will continue through 2020, caused by a demand decline due to the COVID-19 pandemic and ongoing oversupply. However, we see a light at the end of the tunnel. By the end of 2021, the lithium market will return to balance as demand growth resumes from increased electric vehicle adoption and other batteries and eats up new supply.

The 2020s will be a transformational decade for lithium, as we expect demand to grow over 6 times 2019 levels. Additional higher-cost supply will be needed to meet this demand. While there may be further price volatility in the near term, we forecast long-term prices will settle at a marginal all-in sustaining cost of $12,000 per metric ton, as high-quality lithium needed in EV batteries grows to account for 80% of total demand. Our top picks to invest in higher lithium prices are cost-advantaged narrow-moat Albemarle, SQM, and Livent, as our above-consensus lithium price forecast leads our fair value estimates to be at the top of the Street. All three stocks currently trade in 5-star territory. For investors who can look past near-term growing pains and uncertainty, we see significant risk-adjusted upside.

Seth Goldstein does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.