The lithium bull market of the last 2 1/2 years has been powerful and created many millionaires, and new companies, in the process. With lithium carbonate prices soaring from roughly US$4,000 per ton in 2011 to more than US$20,000 per ton (for battery grade material in China) last year the hunt has been on globally to find the next economic lithium deposits that will help fuel the electric vehicle revolution.
The lithium bull went into overdrive during the last quarter of 2017 as supply forecasts remained modest even as lithium prices sat at all-time highs. However, something changed last month shortly after the sector (as represented by the exchange-traded fund LIT) made yet another all-time high. Most lithium market observers will point to the deal reached between SQM and the Chilean government which allows the lithium producer to apply for an increase in its annual production quota. The lithium sector peaked the day before this deal was announced and has declined ~15% since (while many lithium juniors have shed 50%+):
LIT (Daily - 2 Year)
Lithium stocks have been forming a major long term top for the last six months; volume and price action is characteristic of a long term top (massive increase in volume with multiple marginal new highs amid bearish momentum divergences).
Since January 16th we have seen lithium producers decline precipitously with both ALB (Albemarle) and SQM (Sociedad Quimica Y Minera) now testing critical long term support levels:
First downside target for ALB is the open gap down at $91.45, followed by major long term support/resistance near $85. ALB already suffered a "death cross" last week (50-day moving average crossing below the 200-day moving average).
SQM has major support near $49-$50 including its rising 200-day moving average. Below $49 and SQM will be headed down to $42, then $36.
Why the sudden, sharp downturn in the lithium sector? The answer has a lot to do with market forecasts for future supply growth which could "open the floodgates" of lithium supply according to Morgan Stanley analysts:
"A host of lithium projects and expansion plans - including increased production from low-cost Chile brine operator SQM - threatens to add 500 kilo-tonnes per annum to global lithium raw material supply by 2025, swamping forecast demand growth."
That's a tough paragraph to swallow if you're a lithium bull. Just as the pendulum swung too far to one side during the sector's bull run, we may be in the process of seeing the pendulum swing back too far to the other side.
Fears of takeover deals falling through, calls for a nearly 50% decline in lithium prices by 2021, and junior lithium explorer shares dropping by as much as 80% in the last two months are all part of a vicious reset of investor sentiment and expectations for the lithium sector. Global lithium demand is still expected to triple by 2025 according to UBS, which means that we should still expect sharp upside rallies in the sector upon any signs that the "floodgates" of lithium supply might fail to materialize.
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