These lithium charts will shock you

I've been doing this for over three decades. If you want to get ahead in the investing game, I've got probably just four key bits of advice for you. I'm going to give you the first one today. This is the one that has probably cost me the most money in my investing career, and after I tell it to you, my guess is it's probably done you significant damage as well. 

Beware of "Mega Convincing Mega Narratives"!

What is a mega convincing mega narrative? It's that story that captures the imagination of a generation of investors. It's so obvious, the argument supporting it is so logical, and the concept itself is so revolutionary that the case to go all-in is irrefutable (at least in the minds of true believers!). 

Think "The Internet" in the late 90's, think "The Miracle of Chinese Industrialisation" in the early 2000's, think "The Electric Battery Revolution" in the 'teens…

There are many others before, during, and no doubt to come after these, but it's the latter that is the subject of today's article. There's a very powerful mega convincing mega narrative that many Aussie investors are presently obsessed with: Lithium. 

Like many mega convincing mega narratives, the argument that lithium is going to be the world's most important investment opportunity in the next 10 years is supported by countless bottom-left-top-right charts of supply versus demand, as well as growing forecast supply deficits.

I believe many Aussie investors have fallen for lithium's mega convincing mega narrative, and, as a result, they've poured their focus and cash into finding the "next big thing" in the ASX lithium sector. To be fair, many Aussie investors have done very well investing in ASX lithium stocks. I too, have been very active in the sector at certain times.

But my beef with mega convincing mega narratives like lithium, is they're so convincing, you're at risk of holding on well after the smart money has moved on to the next shiny new thing. If you're still holding a bunch of lithium stocks, and those stocks are down 30, 40, 50% or more from their highs, then this might be you.

Charts never lie (except at the top and the bottom!)

Ok, so as the article's title suggests, I better show you some charts which will shock you! How shocking these charts are will depend on how deep you've had your head buried in the sand with respect to the evolving dynamics of lithium minerals markets, and of the major listed global stocks which rely on them.

Let's kick off with lithium minerals markets. There are just a few reliable and transparent touch points for lithium mineral prices, and many of the best ones come from China. This makes sense, given China is one of the biggest players on both the supply, but especially the demand side of the lithium price equation.

The main lithium minerals which are trackable are lithium carbonate, lithium hydroxide, and spodumene concentrate. I will leave it to you to investigate how each fits into the battery supply chain, but this article is all about charts, and all about the proverbial "a picture tells a thousand words".

So enough words. Here's the charts:

Lithium Carbonate 99.5pct Battery Grade (China, Japan & Korea) RMB/mt

Lithium Hydroxide 56.5pct Battery Grade (China, Japan & Korea) RMB/kg

Spodumene Concentrate 6 percent ($US-t)

Note, I have the most data for lithium carbonate and lithium hydroxide, and the spodumene concentrate contract is relatively new. 

Focussing on the longer-dated lithium minerals, the first thing that is apparent is the explosive increase in prices between early 2021 and late 2022 for lithium carbonate and early 2023 for lithium hydroxide. This is the mega convincing mega narrative stage. This bit is the most fun for investors, as anything to do with lithium is booming, and anyone can make money in lithium stocks.

Also, as you'll remember, every ASX-listed mining company was suddenly looking for lithium or acquiring lithium exploration projects. Plus, there was a new lithium IPO or spinoff of existing assets every other day. Chat rooms exploded with talk of this new next big thing.

I've learned to ignore mega convincing mega narratives and instead just focus on the underlying trends in the relevant charts. So, I was very vocal in financial and social media in February and March this year, warning investors of a potential trend change in lithium minerals.

Price trends are simply a function of demand and supply. This demand and supply is created by the most informed investors in the market. These investors trade on the developing underlying fundamentals of a market, not on hype. So, regardless of your interest in a particular narrative, keeping one eye on the charts is sensible.

Lithium minerals prices have steadily declined since their respective peaks, with only a minor blip around April this year. When that rally terminated, and new lows were made, it really was always going to be a case of how low can lithium minerals prices go?

My tip is: Probably most of the way back to pre-exponential move levels. This is typical of most historical booms and busts of this nature. So, I'd be watching for signs of a trend change around CNY 80,000-100,000/t for lithium carbonate, around CNY 80-100/kg for lithium hydroxide, and around US$1,300/mt for spodumene concentrate. 

More shocking charts: The World's Biggest Lithium Producers

It’s a natural conclusion to assume the stock prices of the world's biggest lithium producers aren't faring well, considering movements in prices for their key products. As you peruse the charts below, you will see this is generally the case.

But you'll also note several large drops in yesterday's (16 November) trading session. This is likely due to the release of major global lithium minerals producer Sociedad Química y Minera de Chile (NYSE: SQM) third-quarter results which disappointed the market.

Sociedad Quimica y Minera de Chile (NYSE: SQM) tumbled yesterday on disappointing third quarter results

The name SQM probably rings a bell. This is because it is currently in a scheme of arrangement to buy local lithium explorer Azure Minerals (ASX: AZS). 

The world's second-largest lithium minerals producer reported a 56% drop in third-quarter earnings. Earnings also missed Street estimates by around 6%, leading to an 8% decline in SQM's stock price on Thursday. 

The most interesting points in SQM's results was: 1. It's continuing to build lithium inventories as it produces at maximum capacity; and 2. An increase in SQM's sales volumes helped offset the falling price of lithium minerals on its bottom line. 

I read this as: Lithium producers intend to do everything they can to increase production to help compensate for lower prices, and anything which can't be readily sold, will be stockpiled. These two factors could explain the weakness in lithium minerals prices, and point to a potential key near-term driver.

I am reminded of the oldest rule in commodity markets here: Nothing fixes higher prices better than higher prices.

Here are a few other charts of major global lithium producers, starting in China with world #3 producer Gangfeng Lithium, and world #4 Tianqi Lithium. Then we'll skip across the Pacific to investigate charts of USA majors Albemarle (NYSE: ALB) (world #1), Livent (NYSE: LTHM) (world #8), and Lithium Americas Corp (NYSE: LAC) (world #10). (Other Top 10’s: #5 Mineral Resources (ASX: MIN), #6 Pilbara Minerals (ASX: PLS), #7 Allkem (ASX: AKE))

I think you'll get the picture. Literally.

Gangeng Lithium, Source: TradingView

Tianqi Lithium Corporation, Source: TradingView

Albemarle Corp (NYSE: ALB)

Livent Corp (NYSE: LTHM)

Lithium Americas Corp (NYSE: LAC)

You're probably across the moves in ASX-listed lithium majors. It should be no surprise they're similar to their international counterparts. After all, the Australian stock market, including the lithium sector, doesn't operate in a vacuum! 

To be forewarned about moves in a commodity, and in the major global players dealing in that commodity, is to be forewarned about your Aussie portfolio.

Naughty little narratives

I propose mega convincing mega narratives are dangerous to your financial health. There's always a new one just around the corner, so be very careful what you believe and just how hard you believe it! On this point, let's bullet point the narratives in the "For" and "Against" lithium camp:

Narrative for a continued plunge in prices:

• The hype around supply shortages has dissipated, battery manufacturers feel the market is well supplied and therefore don't have to chase supply with higher prices

• EV manufacturers are struggling with inventory backlogs and low profitability, China manufacturers specifically, with the removal of several EV subsidies

• There is a substantial amount of supply of raw and processed lithium minerals coming on stream now, and in the near future as the global lithium supply chain responded/responds to higher lithium minerals prices

• The supply side is motivated to increase supply volumes to compensate them for lower prices

• Prices remain elevated against long-term averages, and therefore there’s still potential to squeeze margins at producers and refiners

• New battery and energy technologies threaten to undermine lithium's position of dominance in these supply chains

Narratives for a rebound in prices:

• Prices have to stop falling as producer and refiner margins narrow this will crimp supply and move the market back into deficit

• Major EV and battery manufacturers have been destocking, inventories are paring back, and re-stocking could commence soon

• In the long run, there still exists a plausible case for a significant supply deficit for lithium minerals as the world ramps up its transition to electric battery storage

At the end of the day, does either set of narratives really matter? The trends are the trends, and they will either perpetuate or change depending on which narrative is most valid. So, watch the trends, follow the trends!