As the electric car market speeds up, lithium 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, were downgraded from “underweight” to “equal weight” by Morgan Stanley on Monday, according to the Financial Times.

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 doubling over the past two years on forecasts that electric cars would begin to dominate the auto industry, shares of both companies have soared, with Albemarle up 137% and SQM up 257% between the beginning of 2016 and the end of 2017.

Year to date (YTD), however, both stocks have plunged as concerns have grown that lithium prices will drop considerably over the coming years. As of the close of trading on Thursday, Albemarle is down 25% since the beginning of the year, and SQM is down 21%, even as demand for the metal is surging.

Much of that demand is coming 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. Yet, even this rising demand won’t outweigh the onslaught of supply estimated to arrive on the market in the coming years.

Even Bigger 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 will plunge by almost half over the next three years. Lithium carbonate currently sells at a price of $13,375 a tonne, and the analysts expect that price to fall to $7,332 a tonne by 2021.

The sharp drop in prices expected has a lot to do with the sheer abundance of lithium in the Earth’s crust. Thus, 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.

Unfortunately for Albemarle and SQM, that’s just the problem with producing a hot commodity in competitive markets—everyone else wants to start producing it too.