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Did the lithium bubble really burst, or is it just deflated?
Brought to you by Bulls N’ Bears
By Bill McConnell
Bubbles in nature may be beautiful – for some – but in financial markets they are a right pain.
Some see no bubble at all, while others have their fingers planted snugly in their ears in anticipation of a deafening burst. Financial market bubbles often beg the question – is the trend really your friend or is it just leading you down the garden path where you are likely to meet a dark and gruesome financial end?
Dollar Bill casts his keen eye across the immediate prospects for lithium.
Oddly enough, when Dollar Bill was considering this conundrum in light of the huge upswing and equally eye-watering recent collapse in lithium prices, the 1970s B-grade film Animal House came to mind.
In a famous scene, our man Pinto – curiously dressed only in a toga – was presented with a challenging proposition. At a teasingly opportune moment, Pinto finds himself alone with a lovely, scantily-clad lady in his chamber, when an angel appears on one shoulder urging him restraint.
Then suddenly, a devil materialises on his other shoulder, gruffly whispering encouraging words to the effect of, “just go for it”.
While I don’t plan to spoil the outcome of Pinto’s predicament, perhaps real-world lessons can be gained from his wretched dilemma – does he go with the angel or the devil?
There is no doubt that when it comes to lithium prices, there was indeed a bubble. And as certain as pinot pairs with brie and texting after midnight is a bad idea, all bubbles eventually burst.
Right now, a momentum trader would advise against going long on lithium stocks. Trying to pick bottoms is never a good idea, however, any considered fundamental approach to the lithium market would suggest that a recovery is now crowning on the horizon and perhaps now is the time to spin your cap backwards, lay your ears back and get on board.
After all, it was only a year or so ago that market pundits were bemoaning the inflated market caps of lithium stocks and that they had missed the lithium boat. All of which was enough for Dollar Bill to break out the pinot and brie in the smoking room to run some numbers.
And it seems the recent downturn in lithium prices was due to huge accumulations of lithium battery inventories sitting around in warehouses.
According to leading Chinese research company ICCSINO, in January last year, global lithium battery inventories were at a massive 260GWh or thereabouts, which was about four-times the total global battery demand. By January this year, those inventories had run down to just under 100GWH, which was closer to demand – in fact it was slightly lower than demand.
So, Dollar Bill reckons it stands to reason that the price of lithium at the mine gate will likely come down (as it did) if the battery players are soaking up inventories instead of buying lithium to make more batteries. But what happens when they decide their inventories are too low? Will the price hike cycle begin again?
Notably, the ICCSINO says global battery demand in January (when inventories had run down to just 100GWH) was higher than at the same time last year when global inventories were sitting at about 260GWH. This gives Dollar Bill a slight shake in his right leg as it points to perhaps an over-reliance on inventories in 2023 that might cause a flurry of activity in 2024 to rectify the situation and maybe, just maybe, even a brand new bubble – and Dollar Bill loves bubbles.
The draw-down on battery inventories last year in preference to new battery production no doubt led to a dramatically reduced demand for lithium at the mine gate that caused the lithium bubble to unceremoniously burst. The massive build-up of global battery inventories in 2023 likely caused the bubble in the first place, however with ICCSINO pointing to global inventories actually dropping below global demand by January, Dollar Bill’s right leg is now starting to twitch wildly.
Continuing with the theme provided by ICCSINO, battery inventories last year dropped to just one-times demand, from about 260GWh to 106GWh, and then to 90GWh in January. The tied-up value of these inventories was multiple billions of dollars at the start of last year and by January this year, the battery players had put billions back into their pockets by running down their inventories and they are now well cashed up to meet another boom.
But here’s the rub.
To December just gone, battery demand – which is essentially EV demand (with some energy storage included) – almost doubled from 67GWh to 128GWh. And during the same period, battery inventories halved and then halved again, or more accurately dropped by about 75 per cent.
Considering the current state of play, the data highlights that vehicle and stationary storage demand is growing, while battery inventories sit at less than one-times demand.
At the same time, many EV producers are witnessing increased demand and stationary storage is also seeing increasing growth. From a fundamental point of view, this situation suggests the third coming of the lithium angel.
When considering an investment, do you listen to the angel or the devil?
But wait, what about the devil on the other shoulder? Has the lithium bubble burst for good? Should we be shorting lithium and its less famous cousin nickel? Does that seem rational?
One of the fathers of modern economic theory John Maynard Keynes famously once said: “The market can remain irrational longer than you can remain solvent.”
With all that said, we arrive back with our man Pinto not knowing which way to turn. Do we follow the advice from the devil on one shoulder and avoid making the long-term call, or do we consider value and our better angels urging a more considered, long-term and fundamental view?
The one thing Dollar Bill has always loved about the market is that it’s a two-way street. For every position there is a counterweight and the market price reflects the meeting of the two.
It seems clear that fundamentals support a bounce in lithium prices and that the inventory rundown may have had a huge role to play both in the bubble, its bursting and a potential recovery. But equally, the momentum trade is compelling and even if the fundamentalists are right, can your solvency survive the carnage?
Back to our man Pinto, faced with his daunting dilemma and the allegory at hand. Does he take the short-term path to what appears to be immediate and obvious gratification, or does he stand back and consider the future and look to bank a bigger prize?
Or to bring Pinto’s dilemma into the modern era, is the story of depleted inventories and the possibility of surging demand an invitation for the brave to dive in, or is it nothing more than a false flag?
Notably, the most recent International Energy Agency report examined potential demand for critical minerals and it calculated that demand for lithium, based on current consumption levels, could rise between 1000 per cent (10 times) and, quite incredibly, 4000 per cent (40 times) in the next 20 years. This should be absolute nectar for the fundamentalists.
However, not wanting to offer any conclusions, it’s fair to say there’s a devil and an angel in all of us. Dollar Bill also learnt long ago, when it comes to a discussion about someone else’s money and investment advice, the best advice is to say nothing other than to simply present the facts and perhaps add: “It’s my round – same again?“.
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Dollar Bill (sometimes known as Bill McConnell) is an associate director at Bulls N’ Bears and a former derivatives trader. He is also a former financial journalist and a raconteur of note. This column is for informational and entertainment purposes only and nothing contained within it constitutes financial advice – in fact Dollar Bill specifically recommends that you seek advice from someone other than him!