With the rise of electric vehicles and the net zero environmental movement, lithium has become a hot commodity for investors the past few years.
The element is a crucial ingredient in high-powered batteries, so investors were climbing over each other to get their hands on any S&P/ASX 200 Index (ASX: XJO) shares involved in producing it.
However, the past six months have seen a setback to its meteoric rise.
eToro market analyst Josh Gilbert explained a policy change in China had altered the market dynamics in recent months.
"Lithium prices have fallen significantly from their peak, down more than 50% since their record high in November 2022," he said.
"After years of subsidies to battery manufacturers and granting cash rewards to new electric vehicle purchases, China has now halted incentives for the new energy auto sector, which has translated into a decline in demand for battery inputs."
Increasing production to cancel out lower prices
The sinking commodity prices have understandably led to a sell-off of lithium mining stocks.
"Pilbara Minerals Ltd (ASX: PLS) and Core Lithium Ltd (ASX: CXO) [are] down more than 20% in the last six months."
In fact, the Pilbara share price is down more than 33% over the past six months, while Core Lithium has shaved 26% off its market capitalisation.
However, Gilbert reckons both these companies have strategies to counter the lower lithium prices.
"Both are braced for lower prices… and have continued increasing production, helping offset lower prices," he said.
"Pilbara plans to increase production by 17% this year, with a target of doubling production by 2026."
Lithium demand is a long-term story
Besides, investors buying into lithium producers need to take a long-term view, according to Gilbert.
"Electric vehicle adoption has really only just begun and has a long runway, with lithium demand only set to increase in the years ahead," he said.
"According to Bloomberg, lithium-ion battery demand is expected to more than double in 2023 from 2020 levels, whilst EV sales look set to increase by more than 30% in 2023."
Consequently, electric car makers are relishing the lower lithium prices.
"Tesla Inc (NASDAQ: TSLA)'s Q1 deliveries were stronger than expected after price cuts but attention quickly turned to its impressive margins that would likely be affected."
"These falling lithium prices should help to support margin pain – not just for Tesla but also for China's EV makers."
Funnily enough, lower lithium prices could turn out to be a positive in the long run.
"Lower prices across the EV industry could also be a key catalyst to support faster EV adoption, translating into further demand for lithium."
