Sustainability is a topic that has been on everyone’s minds for several years. It is no wonder that research is being conducted into solutions for more sustainable automotive drives. Electromobility is on the advance – whether as a pure electric car or as a hybrid – sooner or later, many drivers will want to switch to a “greener” solution.
With the development of larger charging capacities and a correspondingly greater range, the demand for electrified mobility will increase in the coming years. A large number of raw materials is required for the further development of batteries and their capacity, especially lithium.
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It is therefore not surprising that lithium stocks have been of particular interest to both long-term investors and short-term traders for some time.
This article is intended to give you a comprehensive overview and clarify the questions of what lithium stocks are, which sectors lithium stocks come from, what risks and future prospects arise from buying a lithium stock and how you can find the best lithium stocks.
What are Lithium Stocks?
Most of us know lithium from the lithium-ion batteries found in most smartphones, laptops and tablets. But lithium is also an essential element for the large batteries and accumulators that are built into electric cars, for example. Lithium’s many different uses suggest that lithium stocks could be a worthwhile investment.
But what is lithium actually?
Lithium is a light metal that is also known as “white gold” due to the difficulties it has to mine. Because it reacts very easily with other elements, it does not occur naturally in elemental form and so it is mostly lithium compounds that are used in many products. For example, in the manufacture of (glass) ceramics or in lubricants.
See below the lithium usage in the global market in 2020:
From the above it can be seen that lithium is primarily used for rechargeable batteries. This includes smartphones, laptops and headphones as well as storage elements for solar panels and batteries in electric vehicles. The e-car market in particular will continue to grow and become more relevant over the next few years.
When considering lithium stocks, the stocks of lithium-producing companies on the one hand and those of lithium-processing companies on the other hand may be of interest.
The countries with the largest lithium reserves include Chile with around 9.2 million tons, Australia with 4.7 million tons, Argentina with 1.9 million tons and China with 1.5 million tons (source: Statista, lithium reserves 2020).
Lithium is extracted either through ore mining (e.g., in Australia) or through extraction through salt deserts, so-called ‘salars‘ (e.g., in Chile and Argentina). Such a desert can be found in the Chilean Atacama Desert, for example. The mining over salt deserts has been criticized frequently in the last few years, since a lot of resources are used for this kind of lithium production, above all, water. In Chile, many residents of the Atacama Desert complain about a falling groundwater level and associate this with the costly lithium extraction.
Which sectors do Lithium Stocks come from?
The lithium shares can initially be summarized as the shares of companies that operate mines themselves or obtain lithium as a raw material in some other way. This includes, for example, Lithium Americas Corp., a young company from Canada that is still being established and which, among other things, operates mining projects in Argentina and the US state of Nevada.
Secondly, those stocks can also concern lithium that come from companies that operate their own mines and at the same time take care of further processing, i.e., make the raw material usable and sell it on in the form of batteries, glass ceramics or lubricants. These companies include, for example, the current market leader Albemarle Corp., a US chemical company from North Carolina.
A slightly broader form of lithium stocks may come from the companies that use the finished components in their end products. This could be, for example, electric vehicle manufacturers such as VOW, NIO or Tesla. As the previous market leader in the field of electromobility, Tesla is currently experiencing a surge in growth and is currently (as of June 2021) building several so-called Giga Factories, including in Brandenburg, just a few kilometres outside of Berlin, in order to meet the increasing demand.
The risk with lithium stocks
All these lithium stocks from different stock industries offer the possibility of an investment. But what about the risk with lithium stocks?
The fact is that lithium stocks suffered a severe slump between 2018 and mid-2020, which was mainly due to an oversupply in the raw materials sector. As a result, the lithium price, which had risen sharply in previous years, was halved or third and resulted in a merciless price correction.
The good news, however, is that the future significant increase in demand for lithium cannot be denied, which is primarily due to the strong development of the electromobility sector. In the next few years, it can be assumed that the lithium share price will swing back to its usual heights, as the upward trend that has persisted since the Corona crisis suggests.
Can such a price correction happen again?
Of course, it cannot be ruled out that there may be a phase of oversupply again in the coming years. However, through careful fundamental analysis, it is possible to anticipate such a phase and even use the impending slump to your own advantage.
Future Prospects: Is It Worth Investing in Lithium Stocks?
Of course, it is not possible to say in general whether the purchase of a lithium share will be worthwhile for you personally. However, it can be assumed that the demand for this valuable raw material, especially in the field of electromobility, will steadily increase. The demand for storage elements for solar energy in private households is also getting louder. It is therefore quite conceivable that the sustained upward trend will continue for a few months or even years.
Source: MetaTrader 5 #ALB.US weekly chart, data range: September 3, 2017 to June 11, 2021, accessed on June 11, 2021 at 3 p.m. Please note: past performances are not a reliable indicator of future results.
The above weekly chart from Albemarle Corp shows that there has been a strong upward trend since the last sharp price slump in February 2020. While the price of the stock hit a low of $52.70 at the time, the price has more than doubled by June 2021.
Analysts at the information service Roskill suspect that the demand for lithium will increase significantly over the next 10 years, with an annual increase of 18% until 2030.
How Can I Trade Lithium Stocks?
Now that we know what lithium stocks are and what potential they have, let’s deal with the question of how to buy lithium stocks.
For this it is important to first of all know all the possibilities with which one can trade with lithium stocks. Because there is not only one way to participate in the price development of lithium stocks as a retail client.
Buy lithium stocks
The most obvious way to trade lithium stocks is to buy individual stocks. With the purchase of a lithium share, you acquire a stake in a company and, depending on how the share is structured, you even have voting rights or receive a regular profit share (dividend).
Securities such as stocks are particularly suitable for those investors who are not looking for a quick profit, but for a long-term increase in their capital.
A long-term investment horizon is advisable in view of the development prognosis for lithium stocks, as it is to be expected that demand will increase in the coming years. At the same time, however, the price development can also decline again in the future due to unforeseeable events.
It is therefore essential not to put all hope on a lithium share. Therefore, risk diversification is of particular importance for your own portfolio. What is meant by this is the spread of the risk, which arises from the fact that not all capital is invested in a single value, but is divided, i.e., spread, over different values from different industries or from different companies.
A simple but very effective way of spreading risk is to invest in ETFs (Exchange Traded Funds).
Invest in lithium stocks via ETF
An ETF is a fund that is made up of different parts of exchange-traded values. Usually this replicates a stock index as precisely as possible by investing proportionally according to weighting in all the stocks in the index.
The fact that an ETF invests in a whole basket of values from different companies ensures a broad diversification right from the start. In addition, ETFs have a lower cost structure than, for example, a hedge fund.
So if you are interested in lithium stocks, but at the same time aim for a broadly diversified portfolio, you can also invest directly in a lithium ETF. An example of this is the Global X Lithium & Battery Tech ETF, which consists of stocks from the lithium and battery industry and invests in the lithium stock Albemarle Corp., which has already been mentioned.
Trade lithium stocks with CFDs
Another way to invest in lithium is to trade lithium stocks using CFDs (Contracts for Difference). With a CFD, a so-called contract for difference, you speculate on making a profit from the difference between the entry and exit price.
CFDs belong to the group of financial derivatives (Latin: derivare = to derive), which derive their value from an underlying. With a CFD, you are not buying a lithium share per se, but investing in the price development of an underlying asset.
Another difference to the “normal” investment in lithium stocks is that with the help of a CFD you are able to not only trade on rising prices (long position), but also on falling prices. So, you can attempt profit from it in a targeted manner when prices fall.
Furthermore, you have the option of using a leverage with which you can use a multiple of this with the same amount of capital. You only pay a security deposit (margin), which can be multiplied with a limited leverage for private investors (retail clients).
It should be noted, however, that not only your profits, but also your losses can be leveraged. In the worst-case scenario, all of your capital could be lost. For private investors, however, the European Union has stipulated that only the capital invested may be lost. An obligation to make additional payments is excluded.
In addition to the possibility to trade lithium stocks with CFDs, there is also the possibility to trade lithium ETFs via contract for difference.
How Do I Find the Best Lithium Stock?
The seemingly endless supply of stocks in lithium producing and processing companies can quickly overwhelm beginner traders. Keeping an overview here requires a high degree of attention, a lot of time and a certain amount of experience.
In order to identify the best lithium stocks for your investment, it is advisable to proceed carefully.
1. Watch the industry
Before investing in lithium stocks, ETFs, or trading CFDs, you should first familiarize yourself with the market. Do not just ask yourself the question of the current state of the industry; above all, think about how the lithium market could develop in the future. Above all, pay attention to the relationship between supply and demand.
We now know that lithium stocks experienced a slump between 2018 and 2020. The reason for this was too much supply and too little demand.
The supply has remained the same or even increased since then. At the same time, however, demand has also changed. The electric car industry in particular has concentrated heavily on the sector again in recent months, thus making up for the slack that lasted until 2020.
According to EU Vice President Maroš Šefčovič, the demand for lithium will be 18 times as high by 2030 as it will be in 2020. This will in large part be due to the fact that the goals of the Paris Climate Agreement are to be achieved and, above all, that the automotive industry is focusing on electrification Will put drives.
In this context, it is likely that the supply of lithium will find it difficult to withstand the increasing demand, which will have a long-term impact on price development.
On the other hand, numerous researchers are working on alternatives to the widespread lithium-ion battery. Another, more widespread alkali could replace lithium as the main raw material for battery production: sodium. As of Q2 2021, there are already the first prototypes of a sodium-ion battery that can manage almost as many charging cycles as a classic lithium-ion battery. The advantage here would be the higher availability and the easier way of extracting the raw material. Compared to lithium, sodium is found much more frequently in the earth’s crust.
It remains to be seen whether this technology can catch on. However, you should consider such uncertainties when considering investing in lithium stocks.
2. Follow the politics of the commodity market
The raw material markets in particular can be strongly influenced by political decisions. First of all, there is the so-called country risk, which is about which decisions the respective rulers make in this regard. This can pose a risk, especially after a change of government.
Mining companies in particular were often the subject of new regulations in the past when there was a change of government in the affected region. Especially if the dismantling resulted in environmental pollution and the new government placed a stronger focus on environmental protection. The resulting restrictions can make mining more difficult and have a negative impact on the respective raw material market.
Geopolitical influences should also be considered when considering investing in lithium stocks. Political developments can influence not only the extraction, but also the import and export of raw materials. For example, during the reign of the former US President Donald Trump, whose policies significantly weakened trade relations between China and the USA. China is one of the largest production facilities in the world for lithium and lithium batteries. Critical trade relations could therefore lead to severe restrictions or even to an export ban.
It is therefore of great importance not only to keep an eye on the industry, but also national and international politics, when planning to invest in lithium stocks.
3. Look for proven companies
If you are familiar with the industry, you will certainly have come across some names of companies cited as leaders in lithium mining or production.
The lithium market is a growth market, so it is natural that new companies want to enter the market again and again. However, getting started can be an insurmountable hurdle for small companies, so they have to give up again after a short time.
Depending on how risk averse you are, it may make sense to stick with the established companies in the sector. Especially with long-term investments in lithium stocks, it is advantageous to participate in the price growth of a proven company.
Which Lithium Stock to Buy? The Top 5 Lithium Stocks in 2021
The following presentation of our top 5 lithium stocks of 2021 should by no means be understood as an investment recommendation. Rather, we want to introduce those companies that have turned out to be particularly interesting.
Top 5 Lithium Stocks: The World Leader – Albemarle Corporation
The Albemarle Corporation mentioned above is a US chemical company that not only produces lithium, but also other chemical products. Including catalysts, flame retardants and other chemicals.
Albemarle took over competitor Rockwood as early as 2015 and, according to its own statements, rose to become the world market leader for lithium and lithium products. In 2020, this part of the business accounted for 37% of group sales. It is estimated that Albemarle already holds a third of the world’s lithium business.
At Admirals you can trade Albemarle shares either directly or as a share CFD:
You can also use the Global Lithium & Battery Tech ETF to invest in a basket of lithium stocks, including Albemarle Corp, with a current weighting of over 13%.
Top 5 Lithium Stocks: The Competitor – Sociedad Quimica y Minera de Chile
The Sociedad Quimica y Minera de Chile follows closely on the verses of the Albemarle Corporation and fights for the first place in the world rankings with the world market leader. Even experts do not agree on who is really ahead of the game. However, many industry analysts predict a better future for the Chilean company than for the US company. In addition to lithium products, the Sociedad mainly produces fertilizers, iodine and other industrial chemicals.
The Chilean chemical company also has a great locational advantage, because by far the largest lithium deposits are in Chile. The Sociedad also has very good government connections, which should ensure a long-term supply of lithium.
Source: MetaTrader 5 #SQM daily chart, data range: August 28, 2020 to June 11, 2021, accessed on June 11, 2021 at 3:06 p.m. Please note: past performances are not a reliable indicator of future results.
You can also trade the shares of Sociedad Quimica y Minera de Chile with Admirals directly or via CFD:
Top 5 Lithium Stocks: The Premium Manufacturer – Orocobre
After years of cost-intensive exploration, the Australian mining company Orocobre brought the project into production in the Salar-de-Olaroz in Argentina in 2015. In cooperation with the Japanese automobile manufacturer Toyota and a partner in Argentina, it was determined that the mine has such a large lithium deposit (approx. 6.4 million tons) that production will be secured for the next 40 years.
Source: MetaTrader 5 # ORE.AU daily chart, data range: August 31, 2020 to June 11, 2021, accessed on June 11, 2021 at 3:16 p.m. Please note: past performances are not a reliable indicator of future results.
The above daily chart of the Orocobre share shows that the share price has risen to almost three times as high within six months. It is to be expected that this upward trend will continue for the time being.
Trade Orocobre Lithium Stock with Admirals in physical stocks and CFDs:
Top 5 Lithium Stocks: The Emerging Star – Lithium Americas Corp
The aforementioned Canadian company Lithium Americas Corp is a relatively young, but still promising mine operator with two projects that are still under construction. One mine is currently being built in Argentina and the second will be in the Nevada desert.
An advantage of the second location could be the good economic relations between Canada and the USA and thus lower transport costs.
On the Argentine project, Lithium Americas Corp is working with the Chinese lithium producer Ganfeng, which, among other things, supplies VW with batteries for their electric cars. Interesting opportunities could arise from this collaboration.
According to the company, the start of the mining project in Argentina will take place as early as 2021, while the project in the USA will not begin until the following year.
You can buy Lithium Americas Corp (LAC.US) shares directly from Admirals.
Top 5 lithium stocks: The Battery Manufacturer – Varta AG
The traditional German company is the only one in our list that does not mine lithium itself. However, the company uses the raw material to manufacture its batteries, accumulators and storage elements.
It is only lithium stocks in the broadest sense when you invest in Varta AG. However, this can result in two possibilities:
On the one hand, you can benefit from the current growth in the electrical industry, to which Varta AG is contributing through the production of lithium batteries and accumulators.
On the other hand, the share can be particularly interesting if the lithium price threatens to fall. This is because falling raw material prices can have a positive effect on the company because, as a processing company, they have to buy lithium carbonate.
At Admirals you can buy Varta AG (VAR1) shares directly.
Although the company is not part of the German leading index DAX, it is part of the MDAX, which includes 60 medium-sized companies. You can trade this with Admirals as an ETF or via MDAX CFD.
Should I Buy or Trade Lithium Stocks?
You can only answer this question yourself. We can only provide you with the necessary knowledge.
It is generally beneficial to first be clear about the type of investor you are. Are you more risk-conscious or do you want to keep the risk as low as possible?
Do you want to make a long-term investment in lithium stocks or is it the volatility of the commodity market that interests you?
Consider the answers to these questions and only make a decision when you have the necessary knowledge.
The following video may help you with this:
First test all possibilities in a free demo account and take the chance to familiarize yourself with all market conditions until you are ready to open a live account.
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