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The lithium price boom may be over and everyone is blaming Australia

The outlook for lithium is getting worse as the world’s largest producer of the battery making ingredient is forecasting a further drop in the price of the commodity over the next six months.

Chilean miner Sociedad Quimica y Minera (SQM) has started contract negotiations with customers and has told Fairfax Media Limited (ASX: FXJ) that the September quarter price is expected to fall by less than 10% compared to the previous quarter.

That would be comforting if not for the fact that Lithium is already in a bear market. The price of the mineral that’s used in the next-generation technologies like home battery storage, electric/autonomous vehicles and artificial intelligence has slumped around 24% since its recent peak in January this year.

A drop of 20% or more fits the technical definition of a bear market and it’s telling when a producer with a vested interest in high prices is the one giving the bad outlook.

Adding to the uncertainty is the divergent view on the outlook for the market over the medium to longer term.

It’s payday for short-sellers betting against our leading lithium miners with Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE) among the most shorted stocks on our market. Short sellers are those who borrow stock to sell on-market in the hope of buying it back at a lower price later.

The irony is that it’s these ASX miners that are responsible for the dismal outlook for the sector as SQM and other experts are pointing their finger at Australia.

The problem isn’t demand. Lithium powers the technologies of tomorrow and SQM is forecasting demand growth of around 20% a year. The issue is supply and it’s Australian-based miners that are flooding the market with the likes of Mineral Resources Limited (ASX: MIN) and Pilbara Minerals Ltd (ASX: PLS) adding to the surging supply outlook that is outpacing growth in demand.

But trying to forecast where the lithium market will be in a year or two is a mug’s game. Production issues, supply disruptions and the volatile global economy makes it difficult for anyone to give a prediction with confidence.

Some commodity analysts are predicting a price recovery in a few years, while others like Morgan Stanley predicted in February this year that the price of lithium will crash by 45% by 2021.

I am a bull on the mining sector, but lithium is one mineral I have no exposure to as the lithium market is far less transparent than others like iron ore or copper.

The risk-reward doesn’t favour lithium miners, in my view, while the value proposition for the likes of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) is difficult to ignore.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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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