The 12 FACTORS THAT CAN WORK AGAINST EV/LITHIUM STOCKS AHEAD
A. ECONOMY
A declining global economy that has prospects of turning into a recession ahead is considerable headwinds for autos being one of the most sensitive sector to an economic downturn. High EV prices in the midst of high cost of living issues impacting consumers are causing EV sales growth to decelerate in particular in major developed markets.
B. AUTO MAKERS EV PLANS
If EV growth is expected to be sensational ahead, we wouldn't have major auto makers in US/EU/Japan all winding back their decisions to phase out ICE vehicles for yet a few more years; the reality is that consumers are embracing hybrids with more fervour and with exception of the Chinese market, have become more wary about EVs with range anxiety and cost being top of mind concerns. If major auto makers are not focusing on EVs over the next 1-2 years, it will mean that Chinese EVs would dominate the global EV market but that is not helping EVs to grow and replace ICE vehicles quicker than everyone had thought because not everybody wants to buy a Chinese EV.
C. GOVERNMENT MANDATE
Forecasters had probably based their early projections based on expected phasing out of ICE vehicles based on Govt mandates, which are largely around the 2030s but increasingly, this target will probably not be met and auto makers are starting to push back on their Govts to defer the timeline. At the end of the day, Govts cannot push if consumers are simply not ready. The EV momentum has pretty much stalled - early adopters were even punished for buying early versions of EVs at premium prices only to discover that if they had waited a couple of years later, they could get a much improved EV with better range and cheaper price, while losing out big time on the resale value of their EVs. This has made the mass majority to wait out before committing as they start to believe that the longer they wait, the better and cheaper prices they will get.
D. TARIFFS
Biden's quadrupling of tariffs on Chinese EVs will likely spur tariff impositions by EU and China, collectively will stifle the sale of Chinese EVs in the US and EU, which may be helpful to protect domestic auto makers in those countries but serve to stymie the growth of EVs globally. So tariffs only serve to reduce EV penetration worldwide and delay further the phasing out of ICE vehicles.
E. TESLA'S SHIFT
Elon Musk is no longer as interested to produce and sell more Tesla EVs, instead opting to shift its business model towards the Robotaxi concept- which is using FSD (full self driving) autonomous fleet of Tesla Robotaxis to change the entire transportation landscape from one of ownership to one of pay on demand. This concept means that Tesla could make recurring income and make more money on a smaller fleet of produced EVs, so would not be focusing as much on increasing the delivery of EVs. Less Teslas produced means less lithium consumed. Plus, if Elon is successful on this front, it would create a paradigm change in the structure of transportation- so if Robotaxi becomes the norm worldwide, there is less need for EVs because car ownership could become a thing of the past- this will resonate with Gen Zs as they won't need to own them, help the climate, reduce need for parking, reduce need for mining etc.
F. TRUMP
The Trump factor is negative for EV/Lithium because 1) the man does not believe in EVs and very much against it, so he could unwind the subsidies for EVs in Biden's IRA and 2) he has more than a 50pc chance of becoming the next US President. It doesn't surprise me that US legacy auto makers are holding back their full EV plans in anticipation of Trump becoming President again.
G. EV DEMAND [HYBRIDS & SMALLER EVs]
Factos A-F above all have an overall adverse effect on EV demand growth going forwards, and without a crystal ball, we should expect that over the next 1-3 years, hybrids and smaller EVs would likely dominate. Smaller EVs (think BYD's Seagull) would likely scale up quickly due to affordability but if EV growth results from largely smaller EVs, lithium demand would be considerably less, because smaller EVs would share the spoils between sodium-ion batteries that don't use lithium and LFP (lithium phosphate) batteries.
H. LITHIUM SUPPLY
Much of the earlier narratives have been around the lack of lithium supply to meet EV growth. But despite much lower lithium prices, lithium developers and miners are not ceasing their operations because despite lower lithium prices, they still are reasonably high enough to be profitable for them to proceed producing. They would just need to contend with producing more at lower margins. We have seen SQM proceeding with capacity expansion in Chile, new Zimbabwe mines coming into operations as well as in China. Slowing EV growth also allowed time for supply to catch up so there is no large imbalance as we had before, therefore lithium prices are likely to stay rangebound at the present lower end for a couple more years.
I. CONTROLLED PRICING
About 70% of processed lithium for battery is consumed/processed in China which also dominates the EV battery production at least for a number of years more. This will likely imply that China can control the price of lithium that miners produce, making them (miners) essentially price takers. We all know that China's strategy is to export its way out of trouble and they are able to produce reasonably quality and technologically advanced EVs at lower costs given them a considerable advantage over their Western peers. So at least over the next 1-3 years, most of the EVs sold in the world would primarily be Chinese EVs, and Chinese EV makers have their own access to cheap supply of lithium from emerging economies in Africa and South America.
J. BATTERY TECHNOLOGY
This is another area that is dominated by the Chinese. And battery technology advancement in China is progressing at an incredible pace - they are able to make cheaper and longer range batteries on a continuous basis with nothing to stop their efforts to continue to improve. They have invested billions into sodium-ion battery plants and battery mineral recycling technologies, that we should all be prepared to expect that lithium consumption per new EVs going forwards will only get smaller over time.This should be the most worrying factor for lithium in the EV space in the longer term. CATL has expressed that it should be capable of recycling 91% of lithium in EV batteries by 2040. If that can be done, the US which also has one company initiating this effort, why should miners invest billions to produce so much lithium over the next few decades? And this is where Lithium is not Iron Ore- steel would always be used in construction, lithium in batteries is much more iffy and it won't be long there would be considerable backlash on the billions of litres of water that would be used for lithium extraction.
K. MARGINS
After all the capital intensive plants established by lithium miners, return on invested capital is largely subject to lithium pricing in the market. At today's lithium price, this is hardly attractive as Australian opex/ton is only likely to increase and Aussie miners would soon have to compete against cheaper mining jurisdictions in Africa and South America and lower cost brine operations in Americas. These lithium mines do not have the advantage like say an industrial gas plant which is also capital intensive, as gas plants can be constructed near their customers to supply gas via pipeline based on individually contracted gas rate, while selling bulk gas via tankers at market rates. Lithium miners are totally beholden and vulnerable to prevailing market rates and Australia would have to transport the lithium and with shipping costs getting higher would not be competitive. You can easily imagine cheaper African outputs serving China, cheaper brine outputs and no or less shipping costs from Americas to US EV customers. Australia has no domestic market to sell their lithium to and that is one big negative once every continent has developed their own supply chain.
L. VALUATIONS
Finally, valuations matter. While the smaller cap lithium explorers have burnt and crashed, valuations remain elevated for the three large lithium stocks, PLS, MIN and LTR, their valuations largely underpinned due to their advanced nature of their projects and revenue generating or close to it. But their profitability for 2024 & 2025 (and perhaps even 2026) based on SC6 pricing from $1000-1500/ton does not justify or warrant the premium valuations that they are currently trading at even despite having seen their stock price fallen quite substantially from their peak. Any comparison against their peak pricing should be viewed in the context of extremely elevated lithium pricing at the time. No one expects lithium prices to return to those levels again, not with everything that is going against EV demand and with more lithium supply coming onstream, regardless of demand, in the months and years ahead.
And for those still hopeful that their Aussie lithium stock could be takeover targets, common commercial sense should tell us that only a US based lithium miner would be interested, largely for global footprint expansion objectives. And they have had a go already - SQM did with Azure and ALB decided to walk away from LTR and also walked away from Patriot Battery, means they are not going to do so. If an Indian or Saudi Govt wants to develop an EV industry in their home country, they would prefer to engage into a JV to produce lithium closer to home, otherwise they could simply import the lithium from Australia. The Chinese could be a potential acquiror but they won't be allowed to do so. Hence, the takeover spruiking in some of the lithium HC forums are no more than simply baiting and a poor one at that.
In summary, the macros are bleak for EVs over the next 1-2 years at least, which I coined the term WINTER HIBERNATION, while the jury is out about what the future truly holds for lithium in the EV space. In the interim, EV growth would come at the expense of lithium price growth if any. So we should be all expecting a decelerating EV growth with a moribund lithium industry that will consolidate over 1-2 years at least.
Stale lithium bulls would finally give up in due time, and we know we have reached bottom in the sector when it becomes almost or totally devoid of speculative interests, the same way that gold junior miners lost their mojo at the depth of the gold winter hibernation period.
