[Weekly Roundup] Black Swan Risk Is Rising in the Lithium Market


[Weekly Roundup] Black Swan Risk Is Rising in the Lithium Market

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Hello, Reader.

If you believe in reincarnation, electric vehicle (EV) and EV-related stocks must have done something awful in a prior life. Most of them are suffering a miserable existence on Wall Street these days, and facing a near-term future that looks increasingly uncomfortable.

Partly, EV-related stocks are suffering from the widespread washout in the renewable energy sector that has caused many renewable energy exchange-traded funds (ETF) to crater 60% or more during the last three years.

However, EV-related stocks are also suffering from sector-specific negatives – like the sudden worldwide slowdown in EVs sales growth. Bloomberg New Energy Finance has taken note of the slowdown by slashing its overly optimistic EV sales forecasts. Its newest forecast of annual global EV sales is significantly lower than the forecast it made last year.

Since shiny new Teslas and other EVs are no longer flying off of showroom floors, inventories are growing, and auto manufacturers are putting the brakes on both current and future production plans.

In March, for example, Bentley Motors announced it would delay its planned transition to all-electric vehicles for at least two years. Instead, the luxury automaker will focus on offering plug-in hybrids.

In April, Ford Motor Co. (F) announced a similar plan. The U.S. automaker said it would put some of its planned EV product launches in mothballs, in favor of delivering hybrid models.

A few weeks later, Nissan Motor Co. (NSANY) revealed it would halt plans to develop and manufacture two new EV sedan models in the U.S.

A few days after that, Nissan’s Japanese rival, Toyota Motor Corp. (TM) announced it would push back the planned start of its EV production in the U.S. from 2025 to sometime in 2026.

Announcements like these have cast an artic chill across the entire EV supply chain… all the way back to the lithium-mining industry.

Since the EV industry consumes about 70% of global lithium supplies, the slowing growth of EV sales is very bad news for the lithium market. That’s why lithium prices have plummeted more than 80% during the last 18 months.

Hopes for a rapid recovery are probably just wishful thinking. Despite the EV-driven shock to lithium demand, the global supply continues to grow, along with widespread plans to boost supply even more in 2025 and beyond.

Therefore, to stage a sustainable recovery, the lithium market must overcome the dual threat of sub-par demand growth and excessive supply growth.

In addition, the lithium market now faces at least two possible “Black Swan” risks – unexpected shocks that could derail a bullish narrative.

First, as Popular Mechanics reported recently…

A new study from the University of Pittsburgh and the National Energy Technology Laboratory (NETL) estimates that up to 40 percent of the U.S.’s lithium needs could be supplied by wastewater produced by hydraulic fracturing operations from Marcellus shale gas wells in northern Appalachia.

You heard that correctly; wastewater from fracking operations could potentially supply a huge percentage of projected U.S. lithium demand.

Admittedly, this technology has not yet advanced from the laboratory to the Marcellus Basin, but it could probably advance faster than new technologies typically do.

That’s because the folks who run fracking operations have both the deep pockets and the reputational incentive to bring this new technology to life. Oil companies might relish the opportunity to contribute to the “greening” of planet Earth by converting wastewater into an essential EV component.

A second possible Black Swan risk could be a Trump re-election in November. If he were to occupy the White House a second time, his new administration might reverse some of the policies the Biden administration prioritized, like funding various green energy initiatives that support the EV supply chain.

In the current environment, therefore, the lithium market and most EV-related plays remind me of a memorable line from the late Charlie Munger, Warren Buffet’s long-time investment partner…

At Berkshire [Hathaway] we have three buckets: yes, no and too hard.

The EV sector, broadly, and the lithium market, specifically, have become “too hard.”

The once-promising lithium market is facing daunting headwinds. Although the worst of the selloff may be over, the catalysts for higher prices might take their sweet time showing up.

Instead, I recommend investing in the precious metal sector. In fact, I recommended a new play on platinum in my June issue of Fry’s Investment Report.

To learn more about this latest trade – and the potential I see in the precious metals market – join me at Fry’s Investment Report today.

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Looking Forward

In celebration of Independence Day, the InvestorPlace offices and the U.S. stock market will be closed Thursday, July 4. Our offices, including our Member Services Department, will also be closed Friday, July 5. 

As we all patiently await the long holiday weekend, I’ll discuss just how powerful patience can be as an investing tool in Wednesday’s Smart Money.

Talk soon!


Eric Fry

Article printed from InvestorPlace Media, https://investorplace.com/smartmoney/2024/07/weekly-roundup-black-swan-risk-is-rising-in-the-lithium-market/.

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