As hot as they are, ASX lithium shares have not been immune to the selldown the last few weeks.
However, the long-term global demand for the resource cannot be denied, according to resources sector columnist Barry Fitzgerald.
"The thematic is alive and well. And it's here to stay for decades to come, as governments and companies alike combine forces to rein in global carbon emissions," he posted on Livewire.
"It means decarbonisation is pushing through the current equity market concerns."
That doesn't mean there won't be some volatility in the short term. But eventually, China will abandon zero-COVID, inflation and rates will settle down, and the war in Ukraine will come to an end.
"None of those recovery factors for the global economy are around the corner," said Fitzgerald.
"But they will pass, while all the time, the decarbonisation thematic will continue to gather pace, creating huge and decades-long supply challenges for the broad sweep of commodities plugged into the decarbonisation effort."
Taking advantage of low share prices
Fitzgerald noted that already investors are returning to "take advantage" of low share prices.
He specifically named three lithium producer ASX shares that have massive upside, citing figures from Macquarie Group Ltd (ASX: MQG).
"The firm has a price target on Pilbara Minerals Ltd (ASX: PLS) of $4 compared with its Thursday close of $2.81. Allkem Ltd (ASX: AKE), trading at $13.49, was given a price target of $17.70 and Liontown Resources Limited (ASX: LTR), trading at $1.28, was given a target of $2.50."
Pilbara shares have lost almost 20% since 4 April. The Liontown share price has plunged 37.5% over the same period.
Allkem shares plummeted 20% until a fortnight ago but have rallied 30.75% since.
The sell-off was triggered by market worries about China's latest COVID lockdowns and their impact on lithium demand.
"While there has been a little bit of weakness, the resultant equities sell-off has clearly been overdone."
State of the lithium industry
The big reform currently under way in the lithium industry is to switch customers from fixed-price contracts to a more variable agreement.
Macquarie analysts calculated that Pilbara and Allkem were valued as if their "realised lithium carbonate equivalent price" was US$15,000/t.
But the spot price for lithium is currently at a massive US$70,000/t, according to Fitzgerald.
"There is an almighty scramble by the industry to capture a greater share of the bumper spot pricing by shifting their customers to more variable/index-based pricing contracts," he said.
"Early success in doing just that was why the big US lithium producer Albemarle Corporation (NYSE: ALB) was able to again upgrade profit expectations during the week."
In addition to contractual changes, Pilbara showed this month with its online auction of spodumene concentrates that investor worries about a Chinese slowdown were "overdone".
"The cargo of 5,000/t (grading 5.5% lithium oxide) popped off for a record $US5,955/t," said Fitzgerald.
"On a more standard 6% basis, it equates to $6,586/t, or 5% more than the last auction a month ago."
All eyes will be on the Resources Rising Stars conference on the Gold Coast to be held next week.
"Pilbara boss Ken Brinsden will be giving investors an up-to-date assessment of the lithium market," said Fitzgerald.
"Liontown boss Tony Ottaviano will also be updating investors on the group's Kathleen Valley development."
