Lithium prices are in a funk. Since topping out near $84,000 per ton back in late 2022, the price of lithium carbonate has plunged 88% to just over $10,000 a ton today, according to Trading Economics data.
That's not great news for lithium mining stocks like Chile's Sociedad Quimica Y Minera de Chile (SQM +0.89%), Ireland's Arcadium Lithium (ALTM +0.00%), or Brazil's Sigma Lithium (SGML +1.42%). But here's something that is good news: According to Mining.com today, the world's largest manufacturer of lithium batteries for electric vehicles, China's CATL, may be getting ready to mothball one of its lithium mines and shut down a lithium carbonate production line.
Lithium stock prices are responding positively to the news. As of 10 a.m. ET, SQM shares are rising 10.2%, Arcadium stock is up 10.9%, and Sigma Lithium is doing best of all -- a 15% gain.
NYSE: SQM
Key Data Points
Why China's news is good news for lithium stocks
Why the outsize reaction to CATL's move? The big problem with lithium today is simple: too much production and not enough demand for lithium (and slowing demand for the electric cars that use it in their batteries). If CATL proceeds with its plan to close down its gigantic Jiangxi province lepidolite mine (lepidolite is a hard rock ore containing lithium), though, it will single-handedly cut China's lithium production by 8%.
What's more, according to UBS this move would "help rebalance the supply with demand."
And that right there is the key point. By getting supply and demand back into better balance, the oversupply that has been depressing lithium prices for the past two years should be removed. Prices will be able to rise again, and lithium mining companies like SQM, Arcadium, and Sigma might be able to finally earn some decent profits.
Admittedly, Arcadium Lithium is already earning profits -- $226 million over the past year on a $2.4 billion market cap isn't half-bad. But now it might be able to earn even more. Meanwhile, Sigma Lithium is eking out $9 million profits on a $1 billion market cap, and SQM is arguably worst off of all. On a market cap approaching $10 billion, SQM earned less than $27 million over the last 12 months -- down from $3.9 billion in 2022.
Investors in those stocks are right to applaud today's news.
Is it time to buy lithium stocks?
There are, however, caveats to this equation.
For one thing, CATL hasn't officially confirmed its plans to shutter the Jiangxi mine -- and this entire stock price rally in lithium stocks could evaporate if it keeps producing. That being said, analysts estimate CATL is losing a lot of money at the mine. Producing lithium at the cost of anywhere from $11,230 to $16,860 per ton, then turning around and having to sell it for $10,000, is no way to run a profitable business. If logic plays any part in this, CATL should shut down the mine until prices improve.
On the other hand, investors also need to be aware that even if CATL closes down its mine, not all analysts agree with UBS' bullish forecast. Rystad Energy, for example, still sees lithium output in China as a whole continuing to grow this year, up about 12% from 2023 levels. And globally, lithium supplies could grow as much as 27%.
Long story short, CATL's news is the catalyst for today's rising prices on lithium stocks. But a lot more companies may need to do a lot more cutting of production in order to keep this stock price rally going.
