The Pilbara Minerals Ltd (ASX: PLS) share price fell pretty hard in September 2023, it dropped by 8% over the month. That compares to a 3.5% fall for the S&P/ASX 200 Index (ASX: XJO). The ASX lithium share significantly underperformed, though one month is a short period of time.
Since 10 August 2023, the Pilbara Minerals share price has fallen by more than 20%.
What's going on?
The ASX lithium share tends to go through more volatility than a relatively stable business on the ASX like Telstra Group Ltd (ASX: TLS). It's fairly easy to predict what profit Telstra might be making in a month or a year from now, but for an ASX lithium share it's quite different – the lithium price can bounce around, and demand in the future is less certain.
Demand for lithium is expected to increase over time, however, the short-term demand for electric vehicles (EV) may vary as economic conditions change. A weaker global economy may mean slower demand for lithium, particularly with China being a major segment of the EV market.
As recently reported by Bloomberg, lithium prices have reached the lowest level in two years because of concerns about the strength of Chinese demand for lithium. The news outlet reported that the price of lithium carbonate in China fell to US$22,814 per ton last week before the Golden Week holidays, which means it has almost halved since June.
Bloomberg reported that Goldman Sachs thinks that lithium prices could fall even further if EV sales aren't as strong as the market is expecting.
Why is this impacting the Pilbara Minerals share price so much?
The long-term looks promising for lithium demand and the ASX lithium share. However, investors seem to be focusing on the short-term lithium price and profit that Pilbara Minerals can get for its production.
It costs a miner roughly the same amount each month to produce its commodity. Any extra revenue is a large boost for profit, aside from paying more to the government. But, it's the exact opposite when the lithium price falls – most of the decline in revenue comes off the profit.
Many investors like to focus on how much profit a business is able to make, so it's no wonder that changes to the lithium price are having such a large impact on the Pilbara Minerals share price.
What next?
My colleague James Mickleboro recently wrote about what could happen in October.
Will the lithium price recover? The projected growth of demand for lithium could be supportive of lithium prices in the longer term, but a projection isn't a guarantee, and there could be other battery technologies that don't use lithium in the future.
Time will tell what happens, but the next several months could be bumpy.
