What happened

Lithium stocks got clobbered this week, with shares of nearly every lithium player miner, whether industry titans or early stage, plunging by double-digit percentages. Here's how much the worst-performing lithium stocks had fallen at their lowest points in trading this week as of noon Friday, according to data provided by S&P Global Market Intelligence:

  • Sigma Lithium (SGML -0.85%): Down 17.6%.
  • Sociedad Quimica y Minera de Chile (SQM -0.07%): Down 17.1%.
  • Albemarle (ALB -0.73%): Down 14.6%.
  • Livent (LTHM): Down 14.1%.

Investors fear the best days could be behind lithium stocks. 

So what

2022 has been a banner year for lithium, with prices of the commodity more than doubling year to date amid unstoppable demand and tight supply. Lithium is a key component in batteries for electric vehicles (EVs), and demand for EVs worldwide is growing exponentially.

To put some numbers to that, consider that in October, retail sales of new energy vehicles, including all-electric and plug-in hybrids, jumped 75% year over year in the world's largest EV market, China, despite widespread COVID-19 disruptions. 

Lithium carbonate prices are still hovering near all-time highs as of this writing, according to data from Trading Economics.

So where's the problem, and why are lithium stocks tumbling? It's the future expectations.

In its latest note to investors, Goldman Sachs has predicted lithium prices to cool off from 2023 onwards. While the investment bank still expects the lithium markets to end 2022 on a deficit, it sees a small surplus in supply next year. Goldman Sachs expects lithium "oversupply" and "slowing EV sales" to put downward pressure on lithium prices, especially in the latter half of 2023. 

Meanwhile, rumors about a major Chinese cathode manufacturer slashing its production targets have further fueled fears of a slowdown in the lithium markets. Since cathodes are key components of lithium-ion batteries, any production cut right now could signal decelerating demand for batteries, and therefore lithium.

If supply indeed plays catch up and lithium prices cool off in the coming months, as Goldman Sachs predicts, it'll bring the exponential growth that lithium miners have enjoyed this year to a grinding halt. That very prospect has made investors jittery, and they're dumping lithium stocks in anticipation of the worst.

Now what

While commodity markets are inherently volatile and unpredictable, I'd take Goldman Sachs' warning with a grain of salt.

The investment bank, in fact, has been sounding alarm bells on the lithium markets since mid-2022. In June, Goldman Sachs called for a peak in lithium prices in the second quarter of this year. Its prediction fell flat on its face as lithium prices rose significantly since.

Even if new lithium production comes online over the next year or so, it's hard to see why global demand for EVs could decline. Despite COVID-19 disruptions in China, fears of a recession in the U.S., and the raging war between Russia and Ukraine, global EV sales jumped 62% in the first half of 2022. The European EV market grew too despite macroeconomic headwinds.

To be fair, lithium prices may not double again in 2023 even if they continue to rise, and that will of course mean "slower" growth at lithium mining companies. Yet, that doesn't change the long-term growth story for EVs, lithium, or top-notch lithium stocks like Albemarle -- one of the world's largest lithium mining companies -- and Livent -- a pure-play lithium growth stock that is expanding aggressively.