Lithium stock investors owe thanks to California Gov. Gavin Newsom. Last weekend, the Democratic governor signed into law a ban on the sale of new lawn mowers and other off-road equipment with small gas-powered engines, to take effect as early as 2024. This law should increase demand for lithium, as we'll explore in a moment.
This news is providing a tailwind this week for lithium stocks. (Select lithium stocks have also benefited from company-specific news, though that's beyond the focus of this article.) Through Wednesday, shares of pure-play lithium giant Livent ( LTHM -3.57% ) were up 14%, and shares of lithium junior miners Lithium Americas ( LAC -8.86% ), Piedmont Lithium ( PLL -7.08% ), and Standard Lithium ( SLI -6.55% ) are in the green by about 24%, 11%, and 25%, respectively. By comparison, the S&P 500 index fell 0.6% over the first three days of this week.
California bans sales of new small gas engines used in off-road equipment
The new California law will ban the sale of a plethora of new off-road equipment with small gasoline-powered engines as early as Jan. 1, 2024. This includes lawn mowers, leaf blowers, trimmers, generators, chainsaws, pressure washers, golf carts, and other machines.
The law is aimed at lessening pollution and helping control climate change. (On that note, last month I outlined three of the best climate change stocks to consider buying.) Small off-road engines (SORE) are responsible for more air pollution than many people might realize. In 2020, according to the bill, "California daily NOx and ROG emissions from SORE were higher than emissions from light-duty passenger cars." (NOx and ROG stand for oxides of nitrogen and reactive organic gases, respectively, and together they contribute to the formation of ozone.)
Under the new law, new small off-road engines must be zero-emissions by Jan. 1, 2024, or as soon as the California Air Resources Board determines is feasible, whichever is later. This means that new models of the affected products will have to be electrically powered, either by battery or plug-in.
As with electric vehicles, the reigning type of battery used for the impacted products is the lithium-ion battery. So, more lithium is going to be needed to make those additional batteries.
As California goes...
"As California goes, so goes the country" is a popular saying. Indeed, many new trends and new laws often start in the Golden State and then spread to other states.
The legalization of marijuana is an example of this phenomenon. In 1996, California was the first state to legalize marijuana for medical use. Now, medical cannabis is legal in the majority of states.
So, there's good reason to believe that other states will follow California's lead and ban the sale of new small gas-powered engines for off-road equipment. If so, it will further increase the demand for lithium.
There should be several big winners among lithium stocks
Demand for lithium is going to continue to grow at a rapid pace, thanks largely to the electrification of transportation -- cars, trucks, and beyond. California's new law, which will likely usher in similar laws in other states, will further boost demand.
Albemarle and Livent are solid bets in this group. Of the two, Albemarle is the larger player in the lithium market, but it's not a pure play on lithium, as is Livent. Sociedad Quimica y Minera (known as SQM), also not a lithium pure play, is based in Chile, so it has a higher level of political and currency risks.
Only investors comfortable with higher risk levels should consider investing in one of the smaller, more speculative junior lithium miners, such as Lithium Americas, Piedmont Lithium, or Standard Lithium.