Lithium, the elemental metal, is a hot commodity these days. Since it's used in the manufacture of batteries, building momentum in electric vehicle (EV) sales has many investors feeling optimistic about companies that produce the basic element. Although lithium is a commonplace substance, prices for the material skyrocketed some 400% in 2021 and have exceeded previous all-time highs last reached in 2017 and 2018.

As a result of soaring battery demand from EVs, as well as energy storage (saving power for later distribution to the electric grid), some estimates point to lithium production doubling in the next few years. Here's what you need to know before investing in this basic material used in battery development.

A periodic table, with the element "lithium" and illustrations of batteries in focus.

Image source: Getty Images.

Investing in lithium stocks

Like other basic materials and metals producers, investing in 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. And, as with all mining operations, getting new lithium projects up and running can be a costly endeavor.

Nevertheless, over the past five years, lithium stocks have fared well and prices have risen. Here are five leading lithium producers in this growing market.  

Company

Market Cap

Description

Albemarle (NYSE:ALB)

$32 billion

Currently the world's largest supplier of lithium.

Ganfeng Lithium (OTC:GNEN.F)

$28 billion

China's largest producer of lithium.

Sociedad Quimica y Minera de Chile (NYSE:SQM)

$19 billion

Diversified chemicals and base material producer and major lithium producer.

Livent (NYSE:LTHM)

$4.8 billion

Spun off from FMC in 2019 to create a lithium pure-play business.

Lithium Americas (NYSE:LAC)

$4.3 billion

Currently developing a lithium production site in Argentina with Ganfeng Lithium.

Data source: YCharts. Market cap as of Nov. 23, 2021.

1. Albemarle

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

Though lithium prices can be volatile, Albemarle has proven itself through the years as a durable mining operation. It has plenty of cash to fund new projects, minimal long-term debt, and generates consistent operating profit margins in the low- to mid-teens percentage range. 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

On the other side of the Pacific, Ganfeng Lithium dominates as China's largest producer of base materials for battery manufacturing. Given the sheer size of China (population of 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 U.S. EV manufacturers such as Tesla (NASDAQ:TSLA) that have operations there.  

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

3. Sociedad Quimica y Minera de Chile

One of South America's top basic materials and chemical companies, Sociedad Quimica y Minera (or simply SQM) is one of the world's largest producers of lithium for use 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.

4. Livent

In 2019, chemical manufacturing firm FMC (NYSE:FMC) 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, although sales are rebounding with lithium pricing and demand on the rise.  

FMC still has an equity interest in Livent, so investors can also get a little lithium market exposure via the farming chemical supply stock as well. But, for a focused bet, Livent is the largest lithium pure play around. Operating profit margins are slim at the moment because of supply chain constraints, but the company has plenty of cash and equivalents on hand.

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. That 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 constructing a lithium extraction site in Argentina with its partner Ganfeng Lithium. That 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 (NYSEMKT:SLI) and Piedmont Lithium (NASDAQ:PLL). Tread lightly with these speculative bets.

Stay diversified with lithium 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 increases and declines based on the market price of the material being mined and sold. Although global demand for batteries bodes well for lithium producers, expect plenty of volatility along the way.

To help lessen wild swings in value, consider buying a lithium ETF such as the Global X Lithium & Battery Tech ETF (NYSEMKT:LIT) 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.