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Lithium Stocks Moving Into Buy Territory

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Lithium stocks have not been bearish for quite some time now. However, this does not mean that the investors should shy away from these companies (or not acquire them at all). There are many investors who have plenty of stocks in gold and silver, and they need to look beyond these precious metals. After all, the ever-increasing talk of the Electric Vehicle plans of Elon Musk and Tesla's (NASDAQ: TSLA) is something to consider very seriously indeed. No electric vehicle can run without rechargeable batteries and when it comes to the production of rechargeable batteries the Li-Ion technology is dependent wholly and solely on Lithium.

Rising Demand Levels

While it seems very logical that since everything electronic used by people runs on rechargeable batteries and this means that lithium-based power sources would continue to face an upward demand. However, some times, markets do not follow the logic as seen by most. They run against the fundamentals sometimes and take an altogether opposite direction. Lithium stocks are a perfect example of this reverse trend. Over the last year, the Global X Lithium ETF (NYSEARCA:LIT) has been going down, despite its established future demand prospects.

The apparent reason for the disconnect between the underlying industry demand and lithium stocks seems to stem from an oversupply of the metal as a result of overproduction by the mining companies. Morgan Stanley has gone to the extent of predicting a further tremendous drop in the prices of this metal even in the face of a high level of demand by the companies producing electric vehicles.

Escalation of the US-China Trade War

As if this reason was not enough, there has been a sudden escalation of the US-China trade war in recent months. The situation is not deadlocked, but it is not moving forward either as there seems to be no sign of the two countries reaching a deal any time shortly. China has huge stockpiles of Lithium, and the Chinese foresee themselves as the dominant force in the future supply chain of this 'white petroleum.'

The reason lithium stocks have plunged recently is that like what Morgan Stanley has predicted that the lithium prices are likely to continue to drop in the coming years. This is happening even as demand rises simply because there is an oversupply. The overall demand despite being larger would still not be able to deplete the supply chain in the future. Morgan Stanley has estimated that supplies from Australia, Argentina, and China would likely add 500,000 tons of Lithium to the market annually by 2025. This is more than twice the supply today. Therefore, the demand would still not be able to deplete the supply. Analysts predict that Lithium prices would go down to $7,332 per ton by 2021.

The Big 3 (as they are known) includes: Albemarle, SQM (NYSE: SQM) and FMC have been dominant in Lithium supply, but China emerged as the 3rd largest Lithium producing country in 2018 after Australia and Chile. Chinas Tianqi Lithium (SZSE:002466) controls Australia's largest Lithium mine. The Big 3 holds around 53% share of the world market while China has about 40%. Therefore, it is important for investors to follow the Chinese lithium mining companies a well. Broader portfolio seeking investors can look into smaller Lithium producers in Canada and other places as well.

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