This year has been an incredible one so far for ASX lithium shares, including the Core Lithium Ltd (ASX: CXO) share price, which is up by 165%.
Other lithium miners have also seen major gains.
The Pilbara Minerals Ltd (ASX: PLS) share price has risen by around 50%.
The Allkem Ltd (ASX: AKE) share price has soared up by 44%.
The Mineral Resources Limited (ASX: MIN) share price has leapt by 39%.
The Liontown Resources Limited (ASX: LTR) share price has gone up by around 18%.
It has been a very strong year for the sector, but asset management business Schroders has suggested that things could go wrong if governments try to get involved in accelerating decarbonisation.
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A warning for the 'pot of gold' lithium sector
Martin Conlon, head of Australian equities from Schroders, recently wrote that the lithium industry is a "pot of gold" that "just keeps on giving".
He pointed out that companies that are currently producing such as Pilbara Minerals, Mineral Resources and Allkem are now "very large companies".
Conlon noted that it's understandable that these businesses are now so large because it's "reflective of very high long-run price expectations given the small number of mines involved and limited capital employed relative to market capitalisation."
However, he also said that "prospective producers such as Liontown Resources and Core Lithium are multi-billion-dollar companies well in advance of producing anything."
One of the main things that he pointed out was that while quality high iron ore with a 60% grade "lies fairly close to the surface" in places like the Pilbara, the lithium projects are closer to a 1% grade.
He said "massive quantities of ore need to be moved and processed using large quantities of reagents to deliver the high purity end products". Therefore, the carbon footprint of electric vehicles is "not quite as low as most Tesla buyers would hope".
Estimates of the climate footprint of electric vehicles compared to traditional vehicles suggest that climate neutrality is "only reached after more than 100,000km of driving", according to Conlon.
For now, this doesn't seem to have an effect on the Core Lithium share price.
Why government intervention could be a bad thing
The expert acknowledged that decarbonisation is important to pursue. However:
We believe policies which attempt to accelerate the take-up of electric vehicles and other solutions more quickly than the physical capability of mining and manufacturing can deliver, risk being significantly counter-productive.
Lithium prices are reflective of a mismatch in the ability of supply to respond to demand. These stratospheric prices are vastly higher than needed to incentivise new supply and are therefore difficult to rationalise on any fundamental basis.
Nevertheless, if governments insist on attempting to create additional (often artificial) demand assisted by subsidies to appease the voracious appetite for rapid climate action, there is an obvious possibility large amounts of global taxpayer money will be transferred to 'green metal' producers.
As is usually the case when large scale market intervention displaces free-markets, rational economics will not be overly useful in determining the outcome. The wager in purchasing lithium and many other battery material exposures at present is firmly in the hands of ongoing ill-considered government intervention.
Foolish takeaway
The Core Lithium share price has been a big winner this year, though Conlon raises some relevant points about how the lithium market could be impacted in the future.
