A more hawkish-than-expected US Federal Reserve has triggered a broad-based selloff across equity markets, dragging crowd favourite sectors like lithium and rare earths lower.
Lithium and green metal stocks, more broadly speaking, have pulled back sharply after a massive run-up in late March through to early April.
As the sector takes a breather, here’s some food for thought.
Chinese lithium carbonate prices topped out around 500,000 yuan (~A$105,000) earlier this month, logging its first meaningful decline in 8 months.
The pullback is quite reasonable, given the massive run-up in lithium prices as well as ongoing lockdowns across Chinese electric vehicle (EV) and battery manufacturers.
Lithium spot prices have been running hard for the past 18 months - so what happens to lithium stocks if spot prices start to top out?
Tesla posted better-than-expected March quarter results with a record US$3.3bn profit thanks to strong EV demand.
The result was somewhat widely expected after an upbeat first-quarter vehicle production and delivery update earlier this month. In the March quarter, Tesla delivered 310,038 EVs, broadly in-line with analyst expectations of 317,000 deliveries.
Tesla flagged some challenges including large price increases for some raw materials as well as persistent supply chain issues.
“Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through the rest of 2022,” Tesla said in a statement.
“Higher revenue, earnings and delivery forecasts are all music to the ears of investors and even the long waiting lists highlight just how much demand there is for a Tesla, despite the long wait time,” said Oanda senior market analyst, Craig Erlam.
What's interesting is that Tesla has raised the price across its entire line-up of EVs by around 5-10% in response to higher raw material prices.
Even then, there's no signs of demand destruction.
Essential Metals (ASX: ESS) was placed in a trading halt on Thursday after receiving a non-binding takeover offer.
Essential Metal's said its Dome North Lithium Resources is the only Australian lithium resource no yet committed to an offtake agreement. The company considers itself quite undervalued in the context of market cap to resource, relative to other ASX-listed players.
Despite all the hype behind lithium, there hasn't been much M&A activity, at least in Australia. It will be interesting to see who is behind the takeover offer, what kind of premium or deal is offered and whether the Board considers the offer as good value for shareholders.
The VanEck Rare Earth/Strategic Metals ETF is a good indicator for how the broader lithium industry is performing.
The ETF is comprised of mostly Chinese and ASX-listed lithium and green metal stocks. It's top 5 holdings include (% of net assets):
Lynas Rare Earths 6.4%
Zhejiang Huayou Cobalt 6.3%
Pilbara Minerals 6.2%
AVZ Minerals 6.2%
The ETF hit an all-time high on 4 April, only to reverse sharply and down almost -20% since.
The ETF has returned to its long-standing trading range and trying to stabilise. The low volume reversal indicates that the selloff isn't fueled by panic. Although the ETF has managed to give back gains in rather quick succession.
Having pierced through the 200-day moving average (blue), investors should observe how the ETF performs as it approaches the the high $90 level (red band).
Get the latest news and insights direct to your inbox