What happened

Shares of lithium miner Albemarle (NYSE:ALB) dropped as much as 11.5% in the first half hour of trading on Sept. 23. Peer Lithium Americas (NYSE:LAC) fell even more, falling by nearly 14% in early trading. And Galaxy Resources (OTC:GALXF) beat them both on the downside, with a 14.5% decline. 

There's no question that it was ugly for lithium miners today. Although not all lithium miners declined quite as much, the pain was indeed broad, with both Sociedad Química y Minera de Chile and Livent off in the mid- to high single digits at the start of the trading day on Wall Street. News from a big lithium user is what got investors worried, perhaps justifiably so.

So what

Electric car manufacturer Tesla held its "Battery Day" on Sept. 22. Although the news from the company wasn't as exciting as Tesla investors may have been hoping, there was some important news for any company that mines for lithium. The metal is a key input in batteries for electric vehicles. Although estimates vary, at the start of 2020 Albemarle, one of the world's largest producers of the industrial metal, was projecting that lithium demand from vehicles would expand at an annualized rate of 38% per year between 2019 and 2025.   

While there was notable demand growth expected from other areas as well, like grid storage, the size of the demand in the vehicle space was projected to be massive (roughly 65% of total lithium demand in 2025). So large, in fact, that it pushed Albemarle's overall projection for demand to an annualized rate of 22% through 2025. And then the COVID-19 pandemic upended things, with Albemarle suggesting that the growth in demand had been pushed out, but not materially altered. That makes sense given the anti-carbon fuel zeitgeist today.    

A sign that reads "electric vehicles only" with a car and an electric cord on it

Image source: Getty Images.

But yesterday Tesla, which has disrupted more than one industry in its short existence, talked up the future of its battery operations. There were two big takeaways. The first is that the company is working on improvements that would reduce the amount of lithium needed to make a battery. That's actually a long-term trend in the lithium space, so while it's not good news, it's perhaps not particularly shocking, either. The second piece of news was more troubling: Tesla appears to be gearing up to enter the lithium mining space in an effort to control its costs. That includes new extraction methods that the automaker believes will reduce its lithium costs by as much as a third. Lithium miners reacted as you might expect, by falling sharply.   

There's a big disparity between the miners here. Big players like Albemarle and SQM have market caps of roughly $9 billion and $8 billion, respectively. This pair of relatively large miners also produces more than just lithium, with the metal making up roughly 37% of Albemarle's sales and 20% of SQM's top line. They can handle some uncertainty and lean on other businesses if they need to adjust to changing market conditions.   

SQM Market Cap Chart

SQM Market Cap data by YCharts

At the other end of the spectrum are relatively tiny players like Livent, Lithium Americas, and Galaxy Resources, with market caps of around $1.1 billion, $700 million, and $400 million, respectively. Lithium is basically all Livent does. Galaxy Resources has an active lithium mining operation, but is also working on building out a new mine. And Lithium Americas has no mines today, but big plans to open a couple of them in the near future. This trio may have more difficulty adapting to a fast changing lithium market, given Tesla's plans upend the status quo. That's particularly true for the pair looking to bring new mines to market based on plans that likely didn't include competing with Tesla.   

Now what

Long-term investors looking for a way to play the demand growth expected in the lithium space are probably best off sticking with giants like Albemarle and SQM. Their diversified business will help soften the blow from any setbacks that arise between the market today and the future growth Wall Street is expecting. Smaller players with more focused businesses present the potential for more upside, but if Tesla's lithium plans are any indication, the future could be cloudier than expected. All in, the sell-off at the start of trading today is hardly unreasonable and could be the harbinger of more volatility in the days ahead.