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ASX lithium shares soar on Tesla optimism. Is it time to buy?

The lithium sector has truly come to life in the past few weeks following Tesla‘s delivery of Shanghai-made Model 3 cars, China’s decision to maintain electric vehicle (EV) subsidies and continued investment from numerous automakers in EV R&D.

The subtle change in sentiment has seen lithium miners share prices soar in 2020 – even though we are only 9 trading days into the year. The Galaxy Resources Limited (ASX: GXY) share price is up 24%, the Orocobre Limited (ASX: ORE) share price is up 34% and the Pilbara Minerals Ltd (ASX: PLS) share price is up 19%. Could the sector be coming back to life or is just another short-term bounce for lithium?

Prices have yet to show a bottom 

The lithium spot price has yet to make a positive turn despite increasingly bullish news from the electric vehicle market. Lithium carbonate and lithium hydroxide continued to falter towards the end of 2019. Asian seaborne battery-grade hydroxide prices fell by 50 cents in December to less than $10 per kg (compared to $15 per kg in December 2018), while lithium carbonate prices held steady.

European and US prices fell on competitive offers and slowing market activity. Domestic Chinese prices were unmoved with limited transitions as markets are winding down ahead of the Lunar New Year on January 25.

Without improving spot prices, lithium fundamentals will not materially improve and miners will continue to be reluctant to ramp up production. 

China maintains its EV subsidies 

China began subsidising EV purchases in 2009 to promote the industry but has been gradually reducing handouts to encourage automakers to focus on innovating and competing on their own. This has seen EV sales in China dropping for 6 straight months from July to December 2019. However, the government has recently announced that it won’t continue reducing subsidies for the industry at the same pace this year. 

2020 could be the year 

The significant change in sentiment for the EV industry and for lithium producers is a force to be reckoned with. While I wouldn’t be in a rush to jump on board the EV revolution bandwagon, it does look like lithium miners could go higher from here. In my view, 2020 could very well be the year where lithium producers start to return to their former glory. 

I believe Galaxy Resources is the best positioned producer given its tier one mine Mt Cattlin, which is a stable and reliable operation that is currently viewed as one of the lowest cost spodumene producers in the world. The company has the capability to swiftly and efficiently ramp up production should market conditions materially improve. Its strong cash position of $248.1 million as of 18 November 2019 also allows the company to maintain a healthy balance sheet should weaker market conditions persist.

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Motley Fool contributor Lina Lim 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 Scott Phillips.

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