Lithium, the elemental metal, is a hot commodity these days. Since it's used in the manufacture of batteries, increasing electric vehicle (EV) sales have many investors feeling optimistic about companies that produce and refine the basic material. Although lithium is a common substance, prices for it skyrocketed some 1,000% from 2021 to the end of 2022 -- easily exceeding previous highs reached in 2017.

But 2023 has been a different story, as the effects of inflation and China's long pandemic lockdowns work through the system. Lithium supply is expected to briefly be in oversupply, which has sent prices back down to levels not seen since 2021.

A periodic table, with the element "lithium" and illustrations of batteries in focus.
Image source: Getty Images.

Even with the oversupply, soaring battery demand from EVs and energy storage (saving power for later distribution to the electric grid), have some estimates pointing to a doubling of lithium demand in the next few years.

In the U.S., the 2021 Infrastructure Investment and Jobs Act set aside $5 billion in federal funding for EV charging stations. More recently, the 2022 Inflation Reduction Act was put into place to provide credits for consumers to support President Biden's goal of getting EVs to account for 50 percent or more of new auto sales by 2030. With automakers on board, there will be ample demand for lithium in the years ahead. Here's what you need to know before investing in this basic material used in battery development.

Law of Supply and Demand

The law of supply and demand is an economic theory asserting that supply and demand will meet each other at a certain equilibrium price.

Five leading lithium stocks

Investing in lithium stocks in April 2024

Like any basic materials and metals investment, betting on lithium isn't for the faint of heart. Soaring demand for a material used in the manufacture of a product doesn't automatically equate to higher sales and profits for a company. Supply also plays a hand in the market price of the basic material, so when supply outpaces demand, prices fall -- and the material producer's sales can fall, too, even if overall demand is expanding.

As is the case with all mining operations, getting new lithium projects up and running can be a costly endeavor. It can take many years to ramp up to full production, draining a mining company of its cash and other liquidity in the process.

Chile has also thrown a wrench in the gears. The South American country's president recently announced intention to nationalize the lithium industry with a state-owned company. This would affect the financial results for companies that operate in Chile, as well as any company with plans to develop lithium mining there. Chile's National Congress would need to sign off on the plan before it proceeds.

Chile is the world's second-largest lithium producing country, behind Australia.

Despite challenges, lithium stocks have fared well and prices have risen over the past decade. Here are five leading lithium producers in this growing market: 

Data source: YCharts. Market cap as of Jan 9, 2023.
Company Market Cap Description
Albemarle (NYSE:ALB) $16.02 billion One of the world's largest suppliers of lithium.
Ganfeng Lithium (OTC:GNEN.F) $11.16 billion China's largest producer of lithium.
Sociedad Quimica y Minera de Chile (NYSE:SQM) $15.59 billion Diversified chemicals and base material producer and major lithium producer.
Livent (NYSE:LTHM) $2.9 billion Spun off from FMC in 2019 to create a lithium pure-play business.
Lithium Americas (NYSE:LAC) $977 million Currently developing a lithium production site in Argentina with Ganfeng Lithium.

1. Albemarle

1. Albemarle

Mining and chemical producer Albemarle is leading the charge in global lithium output. Among the company's biggest customers is Panasonic (PCRFY -3.03%), which manufactures lithium batteries for everything from small consumer electronics to EVs.

Albemarle recently made the news with a bid to acquire small Australian pre-production lithium miner Liontown Resources (LINR.F -4.61%). Albemarle hopes to close the deal by mid-2024.

Although lithium prices can be volatile, Albemarle has proven itself over the years to be a durable mining operation with the ability to bring lithium to market. It has minimal long-term debt and plenty of cash to fund new projects, and it generates consistent gross profit margins for a commodity business, and healthy operating profit margins in the low- to mid-teens. If you're looking for individual stocks to bet on long-term lithium usage, Albemarle is a great place to start your search.

2. Ganfeng Lithium

2. Ganfeng Lithium

On the other side of the Pacific, Ganfeng Lithium dominates as China's largest producer of base materials for lithium battery manufacturing. Given the sheer size of China's population (1.4 billion) and the rapid rise in EV sales, Ganfeng is well positioned as a top supplier to EV manufacturers based in China as well as to U.S. EV manufacturers such as Tesla (TSLA 1.85%).  

The company is well-capitalized with cash and manageable debt, and it has generated healthy profit margins.

3. Sociedad Quimica y Minera de Chile

3. Sociedad Quimica y Minera de Chile

One of South America's top basic materials and chemical companies, Sociedad Quimica y Minera (SQM) is one of the world's largest producers of lithium used in batteries and other energy storage technologies. Like some of the other diversified and well-established mining operations such as Albemarle and Ganfeng, SQM generates healthy double-digit operating profit margins, has plenty of cash to fund expansion, and carries minimal debt.

Chile's pending nationalization of the lithium industry could pose risks for SQM shareholders, though. The company is currently highly reliant on Chile, and it remains to be seen how state control of lithium (if implemented at all) would affect SQM's ability to generate a profit.

SQM predicts demand for lithium will outpace supply over the long term, so it has been investing to increase its production capacity. With recent improvements now complete, the company thinks it will be able to increase its market share in supplying lithium, mainly for EV batteries.

4. Livent

4. Livent

In 2019, farming chemical supply company FMC (FMC 0.69%) spun off its lithium production segment. The new company, Livent, had a limited history operating as an independent company before the pandemic struck. Resulting global supply chain issues have been affecting the firm ever since. However, sales soared alongside lithium pricing in 2022.

Livent is one of the largest lithium pure-plays around. Operating profit margins rose into the 40% range in 2022, helping the company invest in expanding its production. As an emerging growth play, Livent's pockets aren't as deep as some of its larger peers, although it does have minimal debt.

To help narrow the gap with leaders in the lithium market, Livent is in process of merging with Australian lithium mining company Allkem (OTC:OROCF). The tie-up is expected to be complete by the end of 2023.

5. Lithium Americas

5. Lithium Americas 

Legacy automakers have big plans to electrify their vehicle lineups in the coming years, which means millions of new EVs could be sold. The potential trend has led to a big jump in smaller, more speculative lithium stocks such as Canada-based Lithium Americas.

Lithium Americas currently doesn't generate any revenue. It is building lithium extraction sites in Argentina with its partner Ganfeng Lithium. It completed a feasibility study on another site in northern Nevada, and has begun construction there. The company has also signed an offtake agreement for raw lithium with General Motors (GM 4.37%).

This makes Lithium Americas a highly speculative stock. Other names in a similar situation that have attracted lots of investor interest are small exploration and development firms such as Standard Lithium (SLI 0.0%) and Piedmont Lithium (PLL 3.47%). Tread lightly with these speculative bets.

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Stay diversified with lithium battery stocks

Investing in mining companies that produce base materials and chemicals can be a wild ride for investors. Stock prices can be volatile and susceptible to sharp fluctuations based on the market price of the material being mined and sold. Although global demand for batteries bodes well for lithium battery producers, expect plenty of volatility along the way, especially in 2023 as producers deal with a lithium oversupply.

To help lessen wild swings in value, consider buying a lithium ETF such as the Global X Lithium & Battery Tech ETF (LIT 0.02%) or invest in a basket of lithium stocks such as the ones listed above. Given the ups and downs in lithium production, keep any investment in this niche of the mining and chemicals industry small, and stay focused on the long term.

Nicholas Rossolillo has positions in Albemarle, Livent, and Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.