Many ASX investors, and certainly those who own ASX lithium stocks, would be aware that this corner of the share market has had a rough trot in recent months.
Lithium shares are certainly not immune from wild swings. But the downturn we've seen over the back half of 2023 and into 2024 is one of the worst slumps investors have had to deal with in a long time.
Nowhere is this more evident than on the ASX short-seller lists. Every Monday, my Fool colleague James publishes a list of the ASX's most short-sold shares. For months now, ASX lithium stocks have been a constant presence on this list.
Just look at this week's list. Pilbara Minerals Ltd (ASX: PLS), Core Lithium Ltd (ASX: CXO) and Sayona Mining Ltd (ASX: SYA) all featured prominently. Pilbara, the largest lithium stock on the ASX, even came in at the number one spot, with a whopping 21% of its outstanding shares being held in a short position.
When an investor shorts a share, they actually borrow someone else's shares and sell them with a promise of returning them at a later date. If the share price has fallen over this period, they make a profit.
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When will the shorters stop targeting ASX lithium stocks?
Obviously, ASX lithium stocks would have proved to be very fertile ground indeed to farm for short-selling gains recently. And judging by this week's short-seller report, that short interest doesn't look like it's fading.
However, long lithium investors might soon get some breathing room, if recent forecasts prove accurate.
Shorters only target companies that they think have a reasonable chance of losing value. With the price crash of lithium and its derivative materials over the past eight months or so, these companies were always going to be a treat for short sellers. But if lithium prices start picking up, we could see those same short sellers run for the door.
We've already seen signs of a recovery. Pilbara shares, for instance, are up more than 23% from their 52-week low from only a few months ago. That's probably thanks to a slight recovery in lithium prices over 2024 to date.
Earlier this week, my Fool colleague went over the views of analysts from Macquarie. They were bullish on lithium's immediate future, stating that "we believe lithium demand growth could outpace that of batteries in 2024".
They added that "We believe that the significant month-on-month increase in battery production plans in March may indicate that demand is better than market expectations".
However, at a similar time, we also covered the views of ASX broker Goldman Sachs. Goldman is forecasting only improvements in the lithium carbonate and lithium hydroxide prices every year from now until 2027. Goldman was slightly more bearish on lithium spodumene, but thinks this compound will start rising as well after a dip in 2025.
If the recovery in lithium prices is as modest as Goldman is projecting, it could mean that it might be a while before we see ASX lithium stocks like Pilbara back at record highs. But it could also mean short-sellers might finally move onto greener pastures. We'll have to wait and see though.
