There has been a total wash-out in the lithium market over the last year. The elemental material is a key ingredient in the lithium-ion batteries that power smartphones and, importantly to the growth story for the lithium market, electric vehicles (EVs). EV batteries are significantly larger than those in phones or even laptops, so the advent of battery-powered vehicles in the last few years was a boon to the lithium mining industry.
Despite reports to the contrary, global EV demand continued to rise throughout 2023. So why did lithium stocks get clobbered? Even businesses that have remained highly profitable took it on the chin -- including Arcadium Lithium (ALTM -2.27%), an integrated miner and refiner that was formed via the merger of Livent and Allkem in January 2024. The stock has been on the move so far in March after getting blasted by worried investors. Is it time to buy?
A complex supply and demand environment, exacerbated by geopolitics
Let me give you a bit of backstory on why I'm talking about Arcadium, because mining and refining isn't my usual domain. However, in 2021, I was looking for a new position in my portfolio to act as a type of "inflation hedge." But I also wanted ownership in a business with some real long-term growth prospects. As part of my hedge, I eventually settled on Albemarle (ALB 1.65%), a leader in lithium mining and refining.
The stock did quite well during the bear market in 2022, but lithium prices appeared to be peaking by the end of the year. I put Albemarle on the back burner, though I held on to the shares I had purchased up to that point.
2023 saw the total meltdown of lithium prices. By the end of the year, all of the massive run-up in the battery material from the years of shortage during the pandemic had been unwound. Now, in early 2024, lithium pricing sits at the lowest level it's been since 2021.
Blame the Economics 101 forces of supply and demand. However, what's especially odd is that while demand for lithium has continued to chug higher from all those new EVs (global EV sales increased over 30% last year, and are expected to continue rising at a double-digit percentage rate in 2024), industry executives continue to maintain that there's only a low to moderate excess supply of lithium. So why did this market crash, dragging down shares of Albemarle and Arcadium (and its predecessors Livent and Allkem) with it?
The real blame seems to be on geopolitics and economic jockeying between the U.S. and China. According to Arcadium CEO Paul Graves at a recent investor conference, high-production-cost lithium products were being tapped by battery manufacturers in China. According to Graves, use of that high-cost material made sense as long as lithium pricing was high, given various U.S. talks and barriers aimed at circumventing tech manufacturing in China. But now that lithium prices have moderated, evidence is mounting that those high-cost supplies are being taken out.
With a bit of excess supply coming down and demand from EVs still rising, the table is being set for a resumption of sustainable growth for the lithium market.
Arcadium stock is no slam-dunk buy
To be perfectly clear, I expect the road to recovery to be very bumpy for the lithium market. Case in point: As I was writing this article, Albemarle announced it was issuing new preferred stock to raise some $1.9 billion in cash needed to complete some of its projects this year and pay down debt. The stock fell on the news, and Arcadium fell in sympathy.
I'm still holding on to my Albemarle position, which I added a bit more to late last year. Late in 2023, though, with the lithium market wiped out by cratering prices, I wanted to up my bet on what I believe will be a growth market once again. I chose Livent (formerly the lithium refining business of FMC Corp (FMC 1.14%)), now Arcadium after its merger with miner Allkem. The idea for this merger is that the Allkem mines will provide much of the raw material for the Livent refineries, as refining can be one of the most profitable bits of the industry.
Arcadium expects its core business to remain highly profitable in 2024. Adjusted EBITDA (or earnings before interest, taxes, depreciation, and amortization) profit margins are expected to be in the mid-30% range or higher, depending on lithium refining margins. Arcadium will be spending $550 million to $750 million to complete some new projects it has in the works, but management believes it already has all the capital it needs to fund those expenditures.
The lithium market appears to be stabilizing at the very least, and ongoing growth in EV demand bodes well for top players like Arcadium that are in solid financial position to survive the fallout -- and profit later on down the line. This stock will be incredibly volatile, and success is far from certain, so it's a small position in my portfolio for now.
