What happened

Shares in specialty chemicals company Albemarle (NYSE:ALB) rose 10.3% in January, according to data provided by S&P Global Market Intelligence.  

The increase builds on a great 2020 for the stock and is almost certainly tied to optimism around its lithium business. The chemical is a key component of batteries used in electric vehicles (EV). Investors have been buying the stock in anticipation of strong demand growth for the chemical for many years to come.

A woman drinking a beverage and looking at her phone leans against an electric vehicle while it charges.

Lithium is used in batteries for electric vehicles. Image source: Getty Images.

Given this level of investor interest, it's not surprising that the share price should be sensitive to any perceived positive news about investment in the industry. Therefore, it's no surprise that the share price received a boost early in the month when Congress certified the presidential election of Joe Biden. The Biden administration is seen as being more friendly to the EV industry, and investors have been piling into the theme

So what

While demand for lithium is highly likely to increase in the future, it's worth remembering that it's still a commodity. In other words, lithium has its own supply and-demand dynamics that create pricing conditions. Thus, demand may well go up, but pricing could go down if supply increases more than demand.

That's a point that came to mind when looking at Albemarle's recent update on its fourth-quarter results.

The company's overall sales fell 11%-12% in the fourth quarter, the company said in its preliminary report. As to its lithium business outlook, management said, "We expect our Lithium business to experience lower pricing, offset by higher volumes. Higher Lithium costs related to project start-ups are expected to be partially offset by efficiency improvements."

The company's other main solutions -- bromine for industrial use and catalysts for refining and petrochemical industries -- have a mixed outlook. Bromine is expected to have higher volumes in 2021, but the company says catalyst demand "is expected to remain well below pre-COVID levels assuming a slow recovery of refining capacity utilization and margins."

Now what

As ever with commodities, investors need to keep an eye on the interplay of supply, demand, and price. Volume demand is coming, but so is capacity expansion, and that doesn't necessarily mean higher lithium prices.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.