What happened

Tuesday is turning into a miserable day to own lithium stocks, as shares of Lithium Americas (LAC), Livent (LTHM), and Albemarle (ALB 3.59%) tumble in response to a negative report on lithium prospects from mining stock analysts at Goldman Sachs.

As of 11:15 a.m. ET, Lithium Americas shares are down 3.5%, Livent is off 6.2%, and Albemarle is leading the whole sector lower with an 8.4% loss.

So what

Let's start with the good news: According to Goldman Sachs, demand growth for lithium over the past few years has been "massive." Problem is, the "supply response" to this increased demand has been even more massive.

Goldman's report shows that demand for lithium to build the batteries to power electric vehicles (and to a lesser extent, other battery-powered devices) began to exceed available supplies of the metal around mid-2020. Currently, analysts estimate that there's about a 100,000 ton annual gap between the lithium carbonate the world needs to build its batteries and the amount that lithium miners like Lithium Americas, Livent, and Albemarle are able to produce in a given year.

This has been good news for lithium producers so far, enabling miners to both sell more unit volume of lithium and charge higher prices for the lithium they produce -- turbocharging sales numbers. Livent, for example, grew its revenue more than 120% in the most recent quarter, and Albemarle's sales were up more than 150%. (So far at least, Lithium Americas has been the odd man out in this bull run, as the lithium start-up isn't yet producing appreciable levels of lithium from its operations.)  

Now what

So that's the good news. Now here's the bad: As lithium miners ramp up production to capitalize on strong demand, the gap between supply and demand is narrowing, and quickly. As soon as early next year, Goldman Sachs predicts that lithium supply and demand will be back in balance. And as 2023 progresses, analysts see production of lithium rocketing past levels that even growing demand can support. Indeed, by 2025, Goldman sees a completely different sort of gap arriving -- one in which lithium miners are producing approximately 400,000 tons more lithium than demand can support.

What are the implications of this analysis? If the analysis is right, then by 2025, the supply-demand shift is going to dramatically erode the profitability of lithium mining companies, driving down profits -- and potentially even causing losses -- at companies like Albemarle and Livent that are currently profitable. At unprofitable Lithium Americas, meanwhile, the situation could be even worse. There it's a race simply to get operations up and running and earn any profit at all before lithium prices begin a slow collapse sometime in the next few months.

Admittedly, as the saying goes, "It's tough to make predictions, especially about the future." Goldman Sachs could very well be wrong about its prediction for the lithium market over the next three years -- but it could also be right. Caveat investor.