The rebound in ASX lithium shares came to a grinding halt after Tesla's battery day. Could Elon Musk's comments about lithium continue to strain the lithium market or is this a buying opportunity for ASX lithium shares?
ASX Lithium shares stumble
The Galaxy Resources Limited (ASX: GXY), Pilbara Minerals Ltd (ASX: PLS) and Orocobre Limited (ASX: ORE) share prices have fallen into negative territory this year following Tesla's battery day announcements. Musk highlighted that lithium is a "widely available resource, one of the most common resources on the planet" and that "Nevada alone has enough to power all vehicles in the US". Tesla announced its intentions to simplify the process to extract lithium and acquired rights to mine some of its supply from 10,000 acres in an unspecified part of Nevada.
While the mass production of electric vehicles by Tesla and other manufacturers will require a lot more lithium, Musk's comments about localising supply casts doubt as to the relevancy of ASX lithium producers. This has seen the Galaxy Resources share price fall 30%, Pilbara Minerals share price fall 18% and Orocobre share price fall 10% last week.
One of the few lithium players that emerged from Battery Day unscathed was Piedmont Lithium Ltd (ASX: PLL). Piedmont is a lithium player focused on its pre-production business of spodumene concentrate and lithium hydroxide in North Caroline, US. The Piedmont Lithium share price soared more than 70% today following its sales agreement with Tesla. This agreement covers a fixed commitment of 160,000 tonnes per annum for an initial five-year term as well as additional quantity to be delivered at Tesla's option. While this agreement does paint the narrative that more lithium will be required for the 'electric vehicle revolution', it does appear that Tesla has a geographic preference of where the lithium is sourced. America.
How are lithium prices?
The catalyst that saw ASX lithium miners spiral from billion dollar valuations to just millions was the oversupply of lithium in the market. This is no different than the supply and demand factors that affect the likes of iron ore miners Fortescue Metals Group Limited (ASX: FMG) and BHP Group Ltd (ASX: BHP).
The challenge is that there has not been any improvement in the lithium spot price for many years. Fastmarkets highlights lithium prices sitting at multi-year lows with brief periods of stability. Even before Tesla's battery day and an improvement in ASX lithium share prices, there was not any material improvement in market conditions.
ASX lithium shares have rebounded on the positive medium to long term outlook in the market. Galaxy Resources for example, believes that the significant stimulus packages in both the EU and China are expected to drive electric vehicle led lithium demand. Furthermore, automakers remain committed to 'electrifying' their fleets and many major manufacturers have recently reinforced their relationships with tier 1 battery manufacturers.
Foolish takeaway
Tesla's intentions to localise lithium supply has weighed down an already vulnerable lithium market. While the medium-long term outlook could still be intact, the weak lithium spot price today means that producers are likely to continue to burn through cash for the near future. I believe the run is likely to be over for ASX lithium shares but investors should continue to watch the space for any signs of improvements.
