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Key points
- ASX lithium shares have provided market-beating returns in recent history due to outstripped supply
- Joe Wright of Airlie Funds is wary of the volatile pricing dynamics at play, but can see the potential for further upside
- Elevated lithium prices could stay for longer than expected in order to address supply shortage
It is hard to argue that ASX lithium shares haven't been some of the most lucrative investments in recent years. Though, for investors, what really matters is what lies ahead for the industry from here.
An investment in any company operating in commodities can be hard to predict. In short, the margins of such businesses are dependent on the favorability of the supply and demand factors at play.
One fund manager has recently published their insights into the accelerating sector. Importantly, the in-depth analysis covers the fundamentals that could possibly drive prices even higher.
The fundamental case for ASX lithium shares
Yesterday, Airlie Funds Management equity analyst Joe Wright published the fund's research into the lithium industry. This followed Airlie's coverage of mining giant Mineral Resources Ltd (ASX: MIN) and its lithium operations.
At the beginning, Wright highlighted the remarkable returns being produced by listed lithium developers and explorers. These companies included the likes of Liontown Resources Ltd (ASX: LTR), Firefinch Ltd (ASX: FFX), and Core Lithium Ltd (ASX: CXO) — amassing gains of 318%, 380%, and 270% respectively in the last 12 months.
The outlandish share price performances trigger a sceptical side of Wright, mindful of the greater fool theory. However, the analyst references the very real chance of there being a significant deficit in lithium supply during the next decade.
As the proliferation of electric transportation and 'green' infrastructure continues, demand appears to be outstripped according to estimates. In turn, ASX lithium shares capable of producing battery-grade lithium are enjoying hefty margins.
Wright highlights how lithium has come to be a sought after material, stating:
Today, due to the superior energy-to-weight characteristics of lithium, lithium chemical products have become an important component of the rechargeable battery cells that can be found in most modern electric vehicles. As the world looks to transition away from fossil fuels, the demand for electric vehicles, and subsequently lithium chemical products, is robust.
While lithium itself isn't particularly scarce, the complex supply chain — involving extraction and processing — makes the end product harder to obtain. Simultaneously, increases in demand are asking for a supply chain quality that is seemingly constantly out of reach.
What needs to happen for increased supply?
The immaturity of the lithium market has created an underdeveloped pricing model, says Wright. To address the predicted supply-demand imbalance, the analyst suggests new lithium production needs to be incentivised. The market appears to be of the same mind — lithium carbonate prices are up ~25% since the beginning of the new year.
Additionally, Wright notes that the elevated prices could hang around for longer than people expect. However, the Airlie Funds' analyst admits there are no crystal balls to tell the exact future for ASX lithium shares. But, given the combination of factors, the fund remains open to the potential of more upside in the sector.
At present, Mineral Resources remains the fund's preferred pick for dabbling in the space. The Mineral Resources share price is currently fetching $64.35, up 68% in the last year.
