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Will lithium shares continue to sink?

Lithium shares were all the rage not too long ago but it appears things have changed.

Numerous lithium companies saw their share prices take a beating last week amid oversupply concerns.

But will the lithium shares continue to slump or is it a good opportunity to buy?

On Monday last week the Orocobre Limited (ASX: ORE) share price was trading at $7.17 but by the end of the week it had sunk to $6.48, with company’s share price dropping by almost 10 per cent on Friday.

Orocobre Limited, a lithium miner with operations centred in Argentina, was expecting the price of lithium carbonate for Olaroz to increase by 25 per cent during the second half of FY 2018.

But the company may need to revise such expectations.

The Kidman Resources Ltd (ASX: KDR) share price also tumbled last week, shedding more than 13 per cent from Tuesday to Friday.

The Pilbara Minerals Ltd (ASX: PLS) share price also took a hit, shedding more than 17 per cent last week.

And the Galaxy Resources Limited (ASX: GXY) share price sunk by 22 per cent over the course of last week.

Many of the ASX lithium shares enjoyed rapid gains last year amid hype surrounding the prospects of soaring demand for cleaner energy, particularly battery powered cars.

Investors rushed to snap up shares in companies with a hand in lithium as governments moved to crackdown on pollution and indicated legislative reforms geared towards encouraging greater production and uptake of electric vehicles.

As a result, speculative lithium shares surged and companies which actually produced lithium saw their shares trade at multiples of earnings that appeared excessive to many.

However, the true extent of global lithium supply remains unknown and new methods are continually being developed to improve lithium recycling capacities.

As such, those issues adding to a rise in production, have increased volatility.

Lithium shares still represent potential for investors but it appears more corrections are likely.

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Motley Fool contributor Steve Holland has no position in any of the stocks mentioned. 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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