Investing.com - Lithium prices are on the path to recovery after a massive 70% decline, driven by increasing demand due to the growth in electric vehicle (EV) adoption worldwide and countries' efforts to meet carbon emission targets. The drop in lithium prices was a result of China cutting EV subsidies earlier this year, which led to weaker demand and rising inventories.
However, as these inventories decrease, experts like Morgan Stanley (NYSE:MS) believe that the lithium market is at a turning point. Lithium-ion batteries play an essential role in renewable energy since they power EVs and store energy generated from solar and wind sources. As more nations transition towards clean energy solutions, lithium demand is expected to continue growing despite increased supply.
Shane Langham, senior private wealth advisor at Sequoia Wealth, highlights that battery-grade lithium or lithium carbonate's rapid increase in demand is primarily due to EV production rates surging. Furthermore, he points out that this doesn't even account for large-scale batteries used for electricity grids or storing renewable energy from solar or wind sources.
With high global EV battery production based mainly in China where most trading occurs, carbonate spot prices have risen 30% from their lows while hydroxide has recovered by 20%. Batteries made up nearly 80% of all lithium usage last year according to Australia’s Office of the Chief Economist (OCE), with expectations that it will reach 90% by 2028 as more people switch to electric vehicles.
Emanuel Datt from Datt Capital believes that improved investor sentiment around EV adoption along with supportive government policies such as President Joe Biden's Inflation Reduction Act helped drive strong price increases for lithium last year.
Global demand for lithium will likely surpass production until around 2027 when supply catches up according to OCE forecasts; meanwhile export earnings from lithium in Australia are expected to triple by the end of June 30th. S&P Global (NYSE:SPGI) Market Intelligence also predicts a deficit of battery-grade lithium, which will support prices above $40,000 per tonne.
Darko Kuzmanovic from Janus Henderson notes that electric vehicle adoption is projected to grow significantly over the next decade with EVs making up more than 40% of all vehicles sold by 2030 according to International Energy Agency (IEA) forecasts. Major automakers such as Ford, GM, Stellantis and Tesla (NASDAQ:TSLA) have been directly supporting lithium projects in order to secure supply for future production plans.
However, some experts like Sam Berridge from Perennial Strategic Natural Resources Fund believe that it may take time for lithium prices to fully recover due to increased supply following high price levels. Despite this outlook, demand growth remains robust and could lead to price stabilization after the recent decline.