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Are ASX lithium shares poised for the next leg up? 

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ASX lithium shares have staged the perfect comeback story, with the likes of Galaxy Resources Limited (ASX: GXY), Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS) delivering triple digit returns since October last year.

A lithium revival  

There has been a global trend for a green-led recovery and the push for carbon neutrality has been gaining momentum. 

China is the world’s largest electric vehicle (EV) consumer, with the government previously extending its US$2 billion in EV stimulus and subsidies to 2020. The Chinese Government is targeting a 20% EV penetration rate by 2025 and has pledged to become carbon neutral by 2060.  

To help repair the economic and social damage caused by COVID-19, the European Commission, the European Parliament and EU leaders agreed on a total of $1.8 trillion euros for ‘a greener, more digital and more resilient Europe’. This will be the largest stimulus package ever financed through the EU budget. 

Turning to the United States, President Joe Biden has reversed many of Trump’s anti-climate policies including rejoining the Paris climate accord. More recently, Biden announced his plans to replace the government’s fleet of cars and trucks with electric vehicles assembled in the US. As of 2019, the US Government had over 645,000 vehicles. 

Following the uplift in lithium demand, the supply-side has also faced its own share of COVID-related interruptions. As a result, month on month lithium prices have finally ticked positive after more than two years of spiralling lower. 

Fastmarkets has highlighted recent lithium market and price developments including: 

  • China’s domestic battery-grade lithium carbonate market continued its uptrend supported by spot material shortage, although buying activity remained thin after the Lunar New Year holiday.
  • The Asian seaborne battery-grade lithium hydroxide spot price recorded its first gain in five months due to increasingly higher prices reported in the market.
  • Europe, US lithium complex moved higher on growing tightness in spot availability.

Pilbara Minerals points to profitability 

Pilbara is among the first ASX lithium shares to report its FY21 first-half results. The company cited improved market conditions and operational performance, supporting positive earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.7 million compared to an EBITDA loss of $24.1 million for the December 2019 half year.  

Commenting on the half-year results, Pilbara Minerals’ Managing Director, Ken Brinsden said: 

Lithium raw material markets are now clearly in an upward trend as it relates to both demand and price, which is now translating to improved spodumene pricing. Further, we are fielding more supply enquiries by the day, implying Pilbara Minerals is well-placed with both low-cost operations and near-term expansion capacity to capitalise on this part of the cycle. 

This result is a step in the right direction for ASX lithium shares after two years of negative earnings. Back in 2018, Galaxy Resources was one of the most profitable ASX lithium shares and despite an approximate $1 billion market capitalisation, it traded at a price-to-earnings (P/E) ratio of just 10!

Foolish takeaway

The lithium revolution is in its early days with significant government stimulus and policies in place to support global EV adoption.

With that said, investors still need to be mindful of the risks involved with ASX lithium shares. Government policies and stimulus could be pulled back. For example, in December 2020, China announced its plans to roll back subsidies for EVs by 20% in 2021. 

At the end of the day, the most important factor is lithium spot prices that directly impact a company’s bottom line. So far, lithium prices have tipped higher, but more demand will be needed to see lithium back at its 2018 highs. 

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Motley Fool contributor Kerry Sun owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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