Lithium, a soft white alkali metal, has staked its claim as being the jack of all trades in the mineral sector.
The mineral is used in foodstuffs, pharmaceutical compounds and, as you may have read in the headlines, in batteries that charge everything from smartphones to electric transport vehicles.
As green energy and the expanding EV marketplace continue to grab attention, lithium will also be on investors’ minds in 2023.
According to the Imarc Group, the lithium battery market stood at $45 billion in 2022. Given the high demand for electric vehicles and computer batteries, the market is expected to skyrocket to $93.3 billion by 2028. That’s a 13.8% compound annual growth rate for a sector that’s just starting to scratch the surface of its market potential.
That scenario represents a quandary for investors, especially as demand for lithium batteries outstrips supply. How do you gauge the short- and long-term value of lithium batteries and what are the best ways to steer money into the sector?
While every investor’s needs are unique, here are a few lithium trading absolutes as 2023 opens for business:
— How lithium prices work.
— Investing in lithium stocks.
— Investing in lithium ETFs.
— Investing in lithium futures.
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How Lithium Prices Work
Before you start plowing money into lithium, first know where the mineral stands in the commodities sector and in the stock market.
For starters, there is no central market price with lithium. Say what you want about gold, silver or zinc, but there’s a set price for each mineral for investors to use as a baseline in making any investment decisions.
That’s really not the case with lithium.
Instead of having a regular, standardized market price, investors have to rely on lithium stock price movements or U.S. Securities and Exchange Commission documents on industry manufacturers for trends on sales, pricing and new mining developments.
Additionally, tracking Chinese markets where pricing standards are more pervasive can help draw a bead on lithium pricing trends. Investors can also check in on the Solactive Global Lithium Index, which monitors lithium producers and lithium buyers.
Having a money manager well-versed in the global minerals market won’t hurt, either.
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Investing in Lithium Stocks
Much of the profit potential from lithium comes from the tight concentration of the product. By and large, a handful of global companies provide the world’s lithium. That makes it tougher to avoid following the crowd and plow deep into the weeds to uncover hidden gems in the lithium market.
That said, there are some stellar performers among both lithium mining and lithium battery charging manufacturers.
Here are a few good places to start with lithium stocks:
Livent Corp. (ticker: LTHM). This stock, currently trading at $23 in mid-January, saw its largest share price increase in seven months after Bank of America boosted LTHM to “buy” from “underperform.”
“Our outlook for the lithium market remains constructive over the medium to long term, though volatility in demand more recently has driven price softness to lithium markets,” Bank of America analyst Steven Byrne said in a Jan. 11 research note. “We see current shares as pricing in too low of a lithium market price over the cycle, and thus rate shares ‘buy’ accordingly.”
Expanding mining operations in Argentina and adding General Motors Co. (GM) to its lithium hydroxide delivery list should also boost Livent going forward.
Albemarle Corp. (ALB). This lithium manufacturer is making red, white and blue waves in early 2023, inking big agreements with the U.S. Department of Energy to build a North Carolina lithium facility and a massive processing plant in Arizona. It’s also announced plans to expand its extraction site in Nevada.
Widely known in lithium circles as the biggest worldwide lithium producer, Albemarle is expected to announce 600% or higher adjusted profit growth in the fourth quarter, just as the 2023 earnings season commences.
That should help ALB stand out from the lower-performing crowd during earnings, and provide a wider path to share growth for the remainder of the year. ALB closed at $243.21 on Jan. 12, which is roughly where it started last year.
Lithium Americas Corp. (LAC). In late 2022, Lithium Americas earned an upgraded relative strength, or RS, rating from Investor’s Business Daily, moving from 90 to 93 under the RS scoring model. The IBD scoring model tracks a security’s behavior over the trailing 52 weeks, measuring it against every other stock in the IBD database.
That’s a good long-term sign for LAC, as the IBD model scores from 1 (worst score) to 99 (best score).
Anything over an 80 RS score has historically led to a run-up in a company’s stock, thus signaling upward momentum for Lithium Americas.
Also offering quality mining potential, a promising long-term cash flow scenario and burgeoning assets in Argentina and the U.S., LAC could be a good starter play for new investors.
[READ: 8 Key Investment Ratios for Stock Picking.]
Investing in Lithium ETFs
One of the relatively safe ways to wade into the lithium battery market is via exchange-traded funds.
One fund that does mirror the Solactive Index is the Global X Lithium & Battery Tech ETF (LIT), which invests in a broad array of lithium products and services, such as mining, refining, distribution and sales.
That’s OK, market analysts say. Remember that in 1849 during the California gold rush, entrepreneurs grew wealthy not on gold itself, but by selling hardtack, picks and shovels, beer, and blue jeans to miners.
One additional note: LIT is a heavily China-based fund (about 50% of the companies tracked operate in China), and investors who are skittish about overseas investing should know that going into the equation.
Other lithium-linked funds also offer opportunity to investors. For example, Australia-based Global X Battery Tech & Lithium ETF (ACDC.AX) and Amplify Lithium & Battery Technology ETF (BATT) are amply stocked with companies in the lithium battery and EV markets. (Note: The Australian ETF is thinly traded and therefore less liquid than would be ideal, but has solid assets.)
For a purer play, kick some tires on Horizons Global Lithium Producers Index ETF (HLIT.TO), which has traded between $35 and $45 from January 2022 to January 2023. The fund was designed to track the Solactive Global Lithium Producers Index.
Investing in Lithium Futures
There’s another way to invest in lithium, although there’s more risk attached.
That’s the deal with lithium futures, which trade via the CME Group, the London Metal Exchange, the Singapore Exchange and the China-based Wuxi Stainless Steel Exchange.
This strategy, which leverages futures and options trading, enables investors to trade lithium without having to own the targeted underlying asset.
Futures exchanges allow investors to bet on current commodity prices, hedge existing market bets and generally wager on whether or not a specific commodity’s price will rise or fall.
There’s some flexibility with futures, too. In the lithium corner of the commodities market, investors can target lithium hydroxide or lithium carbonate compounds used in batteries.
Like most commodities, however, lithium prices have historically been highly volatile and usually send most risk-averse investors to the sidelines. If you do trade lithium on a futures exchange, you’ll be engaging with savvy and experienced market traders, usually investment trading firms, commodity brokers, battery makers, auto manufacturers, hedge funds and other high-level investors.
It’s also worth noting most futures market traders are trying to mitigate market risk and aren’t attempting to speculate aggressively on stocks, bonds and commodities. That’s a good mindset for anyone entering the lithium futures markets.
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How to Invest in Lithium originally appeared on usnews.com
Update 01/13/23: This story was published at an earlier date and has been updated with new information.
