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Investor Spotlight: hype returns to lithium stocks

Increased mergers and acquisitions activity sends ASX lithium stocks higher.

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Amidst lower volatility, hype in the lithium industry has returned following a flurry of mergers and acquisitions.

In this week’s Investor Spotlight, we check in on what’s happening in the lithium market, discuss the recent deals in the space, and analyse the charts of three major lithium stocks.

Prices fall but supply deficit looms on the horizon

Lithium prices have fallen this year after surging in 2022. The cause is twofold.

The first is simply supply and demand. The commodity's price is dropping due to weaker economic activity and tightening financial conditions, along with a slight over in the market.

The second is driven by policy in China. After over a decade of support, China ended subsidies for electric vehicles. Because lithium is a major component in batterings, the end of subsidies weakened demand for electric vehicles at the margin, and therefore lithium.

The price of lithium carbonate and lithium hydroxide has tumbled since the end of last year to trade at levels last seen at the end of 2021.

Source: Benchmark Minerals

What is the difference between lithium carbonate and lithium hydroxide?

Before explaining what may drive lithium prices in the future, it helps to understand the difference between lithium carbonate and lithium hydroxide.

Lithium hydroxide is traditionally a product derived from lithium carbonate. Due to the longer production process, hydroxide typically costs more than carbonate. As a result, lithium carbonate represents the majority of the market.

However, because it is more sustainable and long-lasting, lithium hydroxide is preferred when producing batteries.

A deficit in lithium supply is still likely

Despite the cyclical downturn and shift in market dynamics recently, most analysts believe the lithium market is heading for a structural deficit.

According to research performed by Boston Consulting Group, a lithium supply shortage is expected by 2030, as the demand for electric vehicles outstrips the capacity of miners to extract the mineral.

Source: Boston Consulting Group

The World Economic Forum has sounded the alarm on the situation, too.

It pointed to an analysis performed by the International Energy Agency, which suggested the world will require 2 billion electric vehicles by 2050 for the world to hit net zero.

As of 2021, sales stood at 6.6 million vehicles – less than one percent of that figure – as manufacturers struggle to increase output to satisfy demand.

Australian lithium miners are getting deals done

After cooling off this year, largely as underlying lithium prices fell, Australian lithium stocks have rebounded in recent weeks thanks to mergers and acquisitions activity.

The frenzy began in March after Aussie lithium player Liontown Resources rejected a $2.50 per share bid by US giant Allbermarle. The stock trades at a massive premium to the Albermarle offer, possibly suggesting investors expect either an increase in offer price or perhaps a competing offer.

Liontown Resources weekly chart

Source: IG

The hype was amplified this week with news of the mega-merger of Allkem and American lithium miner Livent.

Allkem, itself a product of a merger between Orocobre and Galaxy Resources, will be one-half of a so-called “merger of equals”, with the new entity to be valued at roughly $10.6 billion. The company will be called “NewCo.” and will be listed on the New York Stock Exchange.

Three lithium stocks to watch

  • Pilbara Minerals

Pilbara Minerals remains a leader in the space and the major lithium producer on the ASX 200.

The technicals show a long-term uptrend for the stock, with signs its recent corrective move is finished and a continuation pattern is playing out. Technical support is around $3.50, while key resistance is $5.00.

Pilbara Minerals weekly chart

Source: IG
  • Core Lithium

Momentum appears to be reversing for Core Lithium, with the stock surging last week.

Resistance has been met around the 50-week moving average and a technical level at approximately $1.14. A break through that level opens a run towards $1.27. Dips have been bought below $1.00 in the past.

Core Lithium weekly chart

Source: IG
  • Lake Resources

Lake Resources shares have been mired in a downtrend. However, the price broke through trend line resistance last week, with the next key level to watch around $0.75. The stock had formed a bottom around support at $0.40.

Lake Resources weekly chart

Source: IG

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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