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Why this top broker says lithium is “our top short idea”

It’s no secret, the demand for lithium is soaring. The Financial Times is reporting that in light of the recent car emission scandals, governments in countries such as France are encouraging car makers to go electric and the French government wants to banish petrol and diesel cars by 2030.

Credit Suisse estimate that sales of rechargeable batteries (which contain lithium) should treble by 2025 to $59bn and grow at a compounding rate of 14% between 2017 and 2022.

If demand is high and expected to keep growing, then why is, Vivienne Lloyd, a metals analyst at top broker Macquarie quoted in the FT as saying lithium is “our top short idea”?

The answer is excess supply. The demand for lithium has not gone unnoticed and Australian lithium miners such as Galaxy Resources Limited (ASX: GXY)Mineral Resources Limited (ASX: MIN)Pilbara Minerals Ltd (ASX: PLS) and Altura Mining Ltd (ASX: AJM) have contributed to the global supply.

So how should investors react? Here is what I would do:

  • Understand where we are in the cycle. Mining stocks are cyclical and go in and out of favour based on global supply and demand.
  • Determine my investment time horizon. In my view the trend towards electric cars is a significant long term trend and so perhaps lithium stocks may fall in the short term but ultimately I think they could benefit in the long run. There is a risk that investors could buy precisely when lithium stocks look overpriced and unattractive, sell when there is a market correction and then not get back in when the long-term upward trend continues. No one knows with certainty how the market will react and that’s why it’s important to understand why you would buy a stock in the first place so that when inevitable fluctuations occur, you do not react out of fear.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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