Why lithium stocks are rising today

Lithium prices are in a funk. Since topping nearly $84,000 a tonne at the end of 2022, the price of lithium carbonate has fallen 88% to just over $10,000 a tonne today, according to Trading Economics data.

That’s not great news for lithium mining stocks like Chile’s Sociedad Quimica Y Minera de Chile (sq 10.18%)of Ireland Arcadiu Litiu (ALT 10.40%)or Brazil Sigma Lithium (SGML 13.39%). But here’s something that it is good news: according to Mining.com today, the world’s largest maker of lithium electric vehicle batteries, China’s CATL, may be preparing to shut down one of its lithium mines and shut down a lithium carbonate production line lithium.

Lithium stock prices are responding positively to the news. As of 10:00 a.m. ET, SQM shares are up 10.2%, Arcadium shares are up 10.9%, and Sigma Lithium is the best performer — a 15% gain.

Why the China news is good news for lithium stocks

Why the huge backlash to the CATL move? The big problem with lithium today is simple: too much production and not enough demand for lithium (and slowing demand for electric cars that use it in their batteries). If CATL goes ahead with its plan to close its giant lepidolite mine in Jiangxi province (lepidolite is a hard rock ore that contains lithium), it will single-handedly reduce China’s lithium production by 8%.

Moreover, according UBS this move would “help rebalance supply with demand”.

And right there is the key point. By bringing supply and demand back into better balance, the oversupply that has depressed lithium prices for the past two years should be eliminated. Prices will be able to rise again, and lithium mining companies like SQM, Arcadium and Sigma could finally make some decent profits.

Of course, Arcadium Lithium is already making profits — $226 million in the past year on a $2.4 billion market cap isn’t half bad. But now he might be able to earn even more. Meanwhile, Sigma Lithium is making $9 million in profits with a market cap of $1 billion, and SQM is probably the worst performer of all. At a market cap approaching $10 billion, SQM earned less than $27 million over the past 12 months — down from $3.9 billion in 2022.

Investors in these stocks are right to applaud today’s news.

Is It Time to Buy Lithium Stocks?

There are caveats to this equation, however.

First, CATL has not officially confirmed plans to shut down the Jiangxi mine — and the entire share price rally in lithium stocks could evaporate if it continues to produce. That said, analysts estimate that CATL is losing a lot of money at the mine. Producing lithium at a cost of $11,230 to $16,860 per ton, then turning around and having to sell it for $10,000, is no way to run a profitable business. If logic plays any part in this, CATL should close the mine until prices improve.

On the other hand, investors should be aware that even if CATL closes its mine, not all analysts agree with UBS’s optimistic predictions. Rystad Energy, for example, still sees lithium production in China as a whole continuing to rise this year, by about 12% from 2023 levels. And globally, lithium supplies could rise by as much as 27%.

In short, the CATL news is the catalyst for today’s price rally in lithium stocks. But many companies may have to cut production much further to maintain this rise in stock prices.