ASX lithium shares: Screaming bargains or falling knives?

With some crashing as much as 90% in a year, is now the time to buy ASX lithium shares?

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ASX lithium shares counted among the worst stock market performers in the year just past.

Taking a look at the share prices over the past 12 months, the All Ordinaries Index (ASX: XAO) has gained a respectable 8%. And that's not including the dividends a number of those stocks pay out.

As for ASX lithium shares, here's how some of the top names performed over this same period:

  • Pilbara Minerals Ltd (ASX: PLS) shares are down 41%
  • Core Lithium Ltd (ASX: CXO) shares are down 91%
  • IGO Ltd (ASX: IGO) shares are down 62%
  • Liontown Resources Ltd (ASX: LTR) shares are down 67%
  • Sayona Mining Ltd (ASX: SYA) shares are down 83%
  • Lake Resources (ASX: LKE) shares are down 87%

I think we can all agree these are some fast falling knives.

What's happening with lithium prices?

As you're likely aware, lithium producers and explorers across the globe have come under heavy selling pressure as the price of the battery critical metal crashed from all-time highs of more than US$8,000 per tonne in November 2022 to just under US$1,000 a tonne this week.

The massive retrace that's been pressuring ASX lithium shares came as rapid global supply growth outpaced slower than expected demand growth.

On the demand side, EV growth rates in the EU and US have dropped markedly as electric vehicles struggle to compete with cheaper combustion powered rivals.

What's next for ASX lithium shares?

Whether ASX lithium shares represent screaming bargains after the past year's dismal performance or remain falling knives hinges on what we can expect for lithium prices.

And on that front, the medium-term outlook looks grim, with most analysts forecasting subdued prices for several years to come.

According to UBS analyst Levi Spry (quoted by The Australian Financial Review), "With a view that lithium markets remain well to over-supplied, we expect prices to stay lower for longer."

UBS rates lithium producers a sell "where valuations still appear stretched". The broker estimates that markets are still pricing lithium in the range of US$1,200 to US$1,480 per tonne.

Commenting on what drove the boom in ASX lithium shares, NabTrade's head of investor behaviour Gemma Dale said (quoted by ABC News):

Seeing Tesla Motors (NASDAQ: TSLA) go to the Moon, there was just a lot of heat in that sector. And what it meant was that investors were chasing a lot of companies that were not hyper viable. There was a lot of hype.

Falling knives or screaming bargains?

Over the short to medium-term, then, ASX lithium shares look more like falling knives that could pare down your initial investment.

However, long-term investors may well look back at today's beaten-down prices as screaming bargains.

"Those [lithium stocks] who have sort of strong, viable business models will perform in the long run. The ones that were a little bit more speculative might not play out quite so well," Dale said.

Earlier this week, Richard Coppleson, director of institutional sales and trading at Bell Potter, labelled ASX lithium share Pilbara Minerals "a super buy at these levels".

Coppleson said, "When lithium does recover, this is back to $5; only question is when will that be?"

Pilbara Minerals shares are currently trading for $3.05 apiece.

Now, whether you're looking to buy ASX lithium shares or any other stocks, be sure to do your own research first. If you're not comfortable with that or don't have the time, just reach out for some expert advice.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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