ASX lithium shares seem to be one of the market's most exciting sectors at the moment.
Between 23 June 2022 to 9 November 2022, the Pilbara Minerals Ltd (ASX: PLS) share price went up by around 170%.
However, Pilbara Minerals shares fell by 34% to 3 January 2023. Since 3 January, Pilbara Minerals shares have risen by more than 25%.
Other ASX lithium shares have seen similar patterns, including Allkem Ltd (ASX: AKE), Core Lithium Ltd (ASX: CXO), IGO Ltd (ASX: IGO), Sayona Mining Ltd (ASX: SYA), and Mineral Resources Ltd (ASX: MIN).
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My thoughts on the lithium sector
Volatility is common on share markets. It doesn't surprise me when investors regularly shift between euphoria and fear on particular businesses. The wider share market occasionally goes through large bumps as well.
It makes sense that the lithium sector creates a lot of excitement. KPMG has estimated the world will need to manufacture more than two billion electrical vehicles to "accommodate world demand and fully transition away from internal combustion engine vehicles by 2050".
Of course, electric vehicles are just one use for lithium. Home batteries and large-scale batteries could increase demand too.
More supply is very likely to come online in the coming years, including the Mt Holland project that Wesfarmers Ltd (ASX: WES) is working on in Western Australia.
If lithium prices stay this high for longer, then it will drive more supply.
But it takes time for that supply to appear, so 2023 could still see a very healthy lithium price. Each ASX lithium share has its own customers, contracts, and method of selling its production.
For example, Pilbara Minerals is benefiting from increased prices from its major offtake customers, as well as a much higher price from the Battery Material Exchange (BMX) platform auctions compared to a year ago.
Strong cash flow and demand
I think that the businesses that are already producing lithium are in a really good place. They are producing enormous cash flow and are reaping the benefits. I think that strong cash flow will continue for (at minimum) the majority of the year.
In the three months to December 2022, we saw Pilbara Minerals increase its cash balance by $851 million.
Hopefully, the ones that aren't producing lithium at the moment will still get to reap the rewards of a good lithium price when they do start producing meaningful output.
In the latest Allkem quarterly update, it said that it expects the average price of lithium carbonate in the third quarter of FY23 to be in line with the second quarter. The ASX lithium share also pointed out:
EV sales growth is expected to remain robust in 2023 given strong order books and potential pent-up demand. Supportive government targets and policies announced globally (including subsidies or tax incentives) continue to ensure strong fundamentals for future growth.
Foolish takeaway
Overall, I think it could be a good year for the ASX lithium share sector as I don't think enough supply will come online this year to drive down the price substantially.
