Investors' love affair with all things lithium to power the electric vehicle revolution could soon come to an end as Galaxy Resources Limited's (ASX: GXY) latest quarterly production report highlighted fresh signs that the price for the commodity may have past its prime.
The share price of Galaxy Resources actually held on better than the sector as the stock only slipped 0.3% to $3.17 yesterday, when mining majors like BHP Billiton Limited (ASX: BHP) tumbled close to 2% and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) shed 0.6%.
Don't get me wrong. Galaxy's quarterly update wasn't bad, and some may even call it bullish. But the miner confessed that the price it gets for its lithium from its Chinese customers is falling, according to the Australian Financial Review.
That's the second consecutive quarterly drop in the price of the battery making ingredient and it debunks the excuse that the drop in the March quarter was due to seasonal factors.
Galaxy reported this time that prices of lithium carbonate sold into China dropped 18% in the June quarter after shedding 10% in the previous three months.
The reason given this time for the drop was waning demand as the Chinese government cut subsidies for electric vehicles and "maturing seasonality" – a term I suspect refers to the premium lithium fetches in China over the rest of the world.
The price gap is starting to shrink but the electrifying run in lithium stocks may not be over just yet.
The price of the commodity outside of China is reported to be still rising and that should, in theory at least, provide a floor to the Chinese price.
The fact that global lithium prices are still trending up will also embolden investors who might be worried enough to take profit after shares like Galaxy have surged 72% in the last year, while Pilbara Minerals Ltd (ASX: PLS) is up 163%, Tawana Resources N.L. (ASX: TAW) is ahead by 103% and Orocobre Limited (ASX: ORE) is 50% in the black.
Further, miners like Orocobre sell most of their product outside of China, in areas such as Europe and the US, and these miners have reported significantly higher prices every quarter in FY18.
If this doesn't quite show the complexities of investing in the sector, then you'll be keen to know that not all lithium miners are the same. The thing is lithium can be sold in different grades and levels of beneficiation, which determines the price.
What this also means is that the pricing information is not as transparent as say copper or even iron ore. Investors will also need to grapple with the risk that the market could become oversupplied with brokers like UBS warning that the lithium price will peak this calendar year.
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