As the electric car market speeds up, lithium (Li) demand is soaring. But lithium stocks, rather than riding the wave of demand for the metal, are drowning amid a flood of new supply set to arrive on the market.

Both Albemarle Corp. (ALB) and Sociedad Química y Minera de Chile S.A. (SQM), producers of the key metal used in electric car batteries, have been rated “equal weight” by Morgan Stanley based on future uncertainty with the price of lithium, as supply and demand for the metal catch up with one another and adjust over time.

Key Takeaways

  • Lithium is a metal, mined from the earth, that trades on commodities markets.
  • Lithium is used in manufacturing batteries, found in personal electronics and electric vehicles.
  • Due to the soaring demand for electric cars, it may be a boon to lithium investors.
  • Still, the market sees an oversupply in lithium that outpaces demand, dragging down the price of lithium producers.

Soaring Demand

With the price of lithium fluctuating wildly over the past few years, with Albemarle and SQM also showing price swings in their stock prices.

With the demand for personal electronics and electric vehicles rising, the price of lithium will become increasingly important for the prices of such consumer products.

Much of the demand is coming from from electric carmakers like Tesla Inc. (TSLA), General Motors Co. (GM), and BMW, as well as from smartphone producers like Apple Inc. (AAPL) and Samsung. This rising demand is spurring exploration for new lithium deposits and a surge in mining, potentially keeping Li prices moderated.

More Supply

Morgan Stanley forecasts that new supply from Argentina, Australia, and Chile, could add 500,000 tonnes of lithium to the market per year by 2025. That’s more than twice as much as the current annual supply of approximately 215,000 tonnes. One of the analysts said, “We expect these supply additions to swamp forecast demand growth,” according to the FT.

If such forecasts are correct, the price of lithium could plunge over the next several years as supply increases may exceed demand. The potential drop in prices thus has a lot to do with the sheer abundance of lithium in the Earth’s crust. As prices have risen on growing demand, new producers can easily jump into the market to get a piece of the action. Most notably, China has begun to develop its own lithium deposits.

For companies like Albemarle and SQM, these are just the economics of producing a hot commodity in competitive markets—everyone else wants to start producing it too.