Lithium roundup: A logical pullback for stocks, China's heatwave to 'support lithium prices'

Thu 18 Aug 22, 12:44pm (AEDT)
Several transmission towers with sunset in the background
Source: iStock

Key Points

  • An unprecedented heat wave is affecting Chinese power output, crimping industrial activities including lithium production
  • Goldman Sachs downgraded China's 2022 GDP growth forecast from 3.3% to 3.0%
  • Food for thought for lithium charts as stocks pull back from a massive run up

We're going to roll out a regular 'lithium roundup', covering any major news, spot price movements, company announcements and technicals.

#1 Heat wave tightens Chinese lithium supply

China is dealing with an unprecedented heat wave with temperatures climbing well above 40 degrees, the strongest heat wave in six decades.

"Producers of lithium, fertilisers and other metals shut plants or curbed output in China’s southwestern Sichuan province on Monday," Reuters reported.

Industrial companies across 19 out of 21 cities in the Sichuan province were ordered to partially halt or suspend operations between 15-20 August as the region begins to ration its power supply.

Sichuan generates approximately 80% of its power from hydro but high temperatures and low rainfall is affecting electricity generation.

"Sichuan province for lithium production in China. Its lithium salts production accounted for approximately 29% of the country's total in the first-half of 2022," according to Fastmarkets' senior analyst Vicky Zhao.

"We have halved our production due to the power rationing in Sichuan province," a lithium producer source told Fastmarkets.

Another source noted that "supply tightness will surely support lithium prices."

#2 China macro remains ugly

Still, China's economy is struggling to get out of a covid and property market induced rut.

On Thursday, Goldman Sachs downgraded the country's GDP growth forecast from 3.3% to 3.0%, flagging near-term headwinds including lockdown risks and power supply constraints, according to Bloomberg.

Zerohedge posted a funny comment online, saying "every day there are five stories about some new imminent stimulus out of China and every day nothing at all happens."

Ugly macro could trickle down to factors such as EV demand, to which the China Passenger Car Association currently expects to sell 5.5m EVs in 2022, up from 3.3m a year ago. But under China's current economic climate, is that still possible?

#3 Thinking about charts

Market volatility is beginning to pick up amid a logical pullback after an extraordinary run since late July.

Most lithium names have experienced 3-5 consecutive red days, down between 5-25%.

The good: The sharp rally has helped longer term moving averages like the 200-day and 50-day slope upwards. The trend is starting to recover.

Mean reversion: Most strong trending stocks tend to pull back to their 20-day moving averages. The V-shaped rebound had many names like Core Lithium (ASX: CXO) trade as much as 25% above the 20-day on Monday.

Inflection point: What kind of pullback will we get? Will stocks soon stabilise, consolidate and set up to break out again? Or will we see another April - July style selloff that wrecks momentum? The 20-day moving average could be a key area to watch.

Perhaps something to note in terms of S&P 500 seasonality, an August high is quite common.

US seasonality
Source: AlmanacTrader


Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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