Orocobre Limited shares are down 15% since Monday: Time to panic?

In afternoon trade the Orocobre Limited (ASX: ORE) share price is amongst the worst performers on the market once again.

At the time of writing the lithium miner’s shares are down 4.5% to $5.87. This means that Orocobre’s shares have lost over 15% of their value since Monday’s close.

What happened?

As we have mentioned previously, the catalyst for this decline was a research note out of Morgan Stanley earlier this week.

That bearish note revealed that its analysts have forecast production increases in Argentina and Australia that could add an additional 500,000 tonnes of supply to the lithium market by 2025.

Considering current annual supply stands at approximately 215,000 tonnes, the broker believes this is likely to cause an oversupply of the metal and a reduction in prices.

According to the note, Morgan Stanley expects lithium prices to almost halve in value to US$7,332 a tonne by 2021 and then US$7,030 a tonne thereafter.

Should you panic?

While this has unsurprisingly caused the shares of lithium miners such as Orocobre, Galaxy Resources Limited (ASX: GXY), and Mineral Resources Limited (ASX: MIN) to tumble, I wouldn’t be rushing to the exits just yet.

Lithium giants Albemarle and SQM are two miners which have been tipped to increase production significantly.

But on a conference call with analysts this week, Albemarle’s management did talk about increasing its production, but also stressed that it would do so carefully.

Management plans to increase production in 20,000 tonnes increments and will slow down or speed this up dependent on the need of its customers.

As a result, it expects the market to continue to remain tight for the foreseeable and believes that supply chain activities show this. It has pointed to automakers going straight to the source for lithium and locking in supply on long-term agreements as a sign that the they don’t see an oversupply occurring any time soon.

I expect fellow lithium giant SQM will also increase its own production carefully in order to avoid an oversupply.

Foolish Takeaway.

I’ll be keeping a close eye on supply levels and the prices being commanded, but I am optimistic that Orocobre, Galaxy, and Mineral Resources will continue to benefit from high lithium prices for a long-time to come.

Not ready to invest in lithium? Then check out these top shares trading at great prices today.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. 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 Scott Phillips.

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