Investors who have bet big on lithium have done very well in 2017 but some experts are warning that the price of the mineral used in batteries will peak this year before halving in price over the next few years.
This could drag on sentiment towards Galaxy Resources Limited (ASX: GXY), Mineral Resources Limited (ASX: MIN), Pilbara Minerals Ltd (ASX: PLS) and Altura Mining Ltd (ASX: AJM) – just to name a few of the more popular lithium miners who have run well ahead of the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the last 12-months.
These stocks have run hard on the back of a surge in lithium prices as investors believe demand for the commodity can only increase due to the stunning growth in electric vehicles around the world.
But the lithium party might be coming to an end with research firm Roskill forecasting that the rally in the commodity will end this year before declining by about half to circa US$12,000 a tonne in three years, reported Fairfax Media Limited (ASX: FXJ).
This bearish prediction is driven by expectations of a surge in supply of the mineral, particularly from Australia, as our miners have been particularly quick to respond to the growing appetite for lithium and eager investors who are jumping on the electrified bandwagon!
But the wave of new lithium projects is threatening to overwhelm the market with at least three new mines in Australia expected to start exporting lithium spodumene this year.
Fairfax reported that Spodumene exports from Western Australia's southern ports surged by 84% between FY14 and FY17, and Mineral Resources' monthly exports from Port Hedland had more than quadrupled to 517,000 tonnes in December from April 2017.
There was already an oversupply of lithium last year but this oversupply will get worse in 2018 and 2019 as any meaningful growth in demand for the mineral won't come for three to five years, reports Roskill who questions if the rapid expansion in production capacity can be sustained during this gap.
However, a fall in the commodity price alone may not put the bull run for our lithium miners at risk. There are multiple factors to consider as well, such as production costs at individual mines and locked-in contract terms with customers.
Having said that, a protracted correction in the price of lithium will make a big dent in sentiment, especially if you consider how much some of these miners have rallied.
I would be cautious about being too heavily weighted towards these miners and would prefer more diversified resource companies such as BHP Billiton Limited (ASX: BHP).
After all, there is more than one way to gain exposure to the electrification of vehicles, which will require a lot of copper and other base metals.
But there is another industry that is also leveraged to the future of vehicles. The experts at the Motley Fool are very bullish on this sector as it will have a significant impact on our everyday lives in the not too distant future.
Click on the link below to get your free report on this sector and the stocks to put on your watchlist for 2018.
