Lithium stocks are showing signs of a bottom. But fundamentals remain challenging

Lithium stocks are showing signs of a bottom — these are probably the famous last words before the sector crashes to a new multi-year low. But in all seriousness, the sector is demonstrating some impressive strength, especially at a time when the broader market is trading sharply lower.

One of my favourite benchmarks to track the lithium and broader battery metal sector is the NYSE-listed VanEck Rare Earths and Strategic Metals ETF (NYSE: REMX). The ETF is up 11.3% so far this month, with recent gains pushing it to a fresh three-month high. Over the same time period (1-19 Mar), the ASX 200 is down 3.9% and the S&P 500 is down 5.7%.

The REMX ETF

The ETF holds a diverse range of critical metal stocks, with its top three holdings including:

1. Sociedad Quimica Y Minera (SQM), one of the world's largest lithium producers (8.57% of net assets)

2. MP Materials Corp, an American rare earths producer (8.15%)

3. China Northern Rare Earth Group, one of the world's largest rare earths producers (7.20%)

It also includes ASX-listed lithium players like Pilbara Minerals (4.71%), Liontown Resources (3.43%), and Vulcan Energy (2.61%), making it a solid gauge of battery metal performance and sentiment.

What is left is bouncing

There's not much left of the local lithium sector. There's a long list of hopeful names like Argosy Minerals, Core Lithium, Lake Resources, Sayona Mining and more, down at least 50% in the past twelve months. Of the few quality names that remain, their charts are starting to show signs of life.

Liontown (ASX: LTR) shares are up 20% in the last four sessions to break out of its recent trading range and hit a fresh three month high.

Liontown price chart (Source: TradingView)

Pilbara Minerals (ASX: PLS) has broken out of a steep downtrend and is up 15% in the last four sessions.

Pilbara Minerals price chart (Source: TradingView)

A related name like Lynas Rare Earths (ASX: LYC) has also broken out of a volatile base, trading at its highest level since 13 November 2024.

Lynas Rare Earths price chart (Source: TradingView)

Revival drivers

What’s particularly intriguing is that lithium prices have stayed relatively tame over the past month. Chinese lithium carbonate futures are essentially flat year-to-date, hovering around 75,000 yuan per tonne.

Despite flat prices, the rally may have been supported by China's batch of stronger-than-expected economic data points on Monday, including:

• New and existing home prices dipped by 0.14% and 0.34%, respectively, month-on-month in February—a modest decline compared to steeper drops seen throughout much of 2024.

• Industrial production jumped 5.9% in January-February, beating market expectations of 5.3%.

• Retail sales rose 4.0% over the same period, up from 3.7% the previous month, marking the strongest gain since October 2024.

• Fixed asset investment soared to 4.1% in January-February, accelerating from 3.2% and reaching its highest point since April 2024.

This upbeat data ignited a rally in the local materials sector, led by names like Mineral Resources (+11.5%), Pilbara Minerals (+7.1%), Fortescue (+4.1%), Paladin Energy (+3.7%), and BHP (+2.4%). On the same day, China’s State Council announced plans to boost consumption by lifting household incomes, as reported by Xinhua News Agency.

In the past day, two of China's largest EV brands have also made significant breakthroughs to bolster the EV sector. BYD unveiled a new charging system that fully charges EVs in five minutes, while Zeekr promised free driver-assist systems with every EV purchase—bold moves to bolster the electric vehicle sector.

The bottom line

Lithium stocks have staged a sharp recovery over the past week, but zoom out, and it’s just a faint green candle in a relentless downtrend. Despite several names rallying 10-20% in recent days, lithium prices remain stubbornly flat, underscoring persistent worries about a market surplus and bloated inventories.

While the stocks might keep climbing — buoyed by factors like short covering — the underlying commodity will eventually need to pull its weight.

If it doesn’t? Macquarie’s recent note on Liontown sums up the dilemma, which retained a Neutral rating and a 65 cent target price: “Liontown is sailing through choppy waters in a tough lithium market and must tightly manage costs ahead, especially if spodumene prices stay stuck at US$840/t.”