By Matt McCallMar 09, 2018
The NexGen lithium sector has been a favorite of mine for some time now. In fact, Albemarle (ALB), one of three major players in the global lithium space, was my pick for InvestorPlace.com’s Best Stocks for 2017 contest and it returned a whopping 48.6% last year.
This year I have my sights set on FMC Corp. (FMC), another one of the big three lithium producers. It joined in with the overall sector’s strength over the last two years – rallying 155% in 2016 and 2017 – but with the group as a whole coming under fire so far in 2018 it has also taken a bit of a hit. The selling is the result of concerns of oversupply in the years ahead, which is the exact opposite of the catalyst that initially drove the sector higher.
Two main events have driven these fears. The first was an agreement between Chemical & Mining Company of Chile (SQM) and the Chilean government that allowed the company to expand its operations and produce more lithium. Naturally, this will increase supply; however, it’s not expected to come online for another few years and I still don’t believe it will be able to keep up with rising demand.
The second event was a research note from Morgan Stanley, in which the firm downgraded the entire sector and predicted that the price of lithium carbonate would decrease 45% by 2020 as a result of increased supply from both major and junior lithium producers. It also suspects that demand for electric vehicles (EVs) will not be as high as expected.
With all due respect to the analysts at Morgan Stanley, this prediction has little merit – if any at all. Again, there is no question that there will be increased supply of lithium in the coming years, but the odds of it being able to keep up with the very high demand as more EVs hit the road are low. And even if it could, the research firm failed to take into consideration the demand for lithium for battery storage in other aspects of the industry, which could be enormous.
Then there is the supply side of the equation, where several facts have me hesitant to put a lot of value in the market’s fears. First, many suppliers have been unable to meet their prediction numbers over the years. Second, a lot of the expected increase in supply is anticipated to come from small companies that have never before produced lithium. And third, not all of the lithium produced is of a high-enough grade to be used for EVs and battery storage. Therefore, I’m really not concerned.
While I remain bullish on the lithium industry, this fear of oversupply has sent many investors running for the hills. That has weighed on the entire sector, and FMC in particular fell 17.1% through the first two months of the year before starting to rebound over the last week.
But when a stock rallies as much as FMC has over the last few years, short-term pullbacks become inevitable. That’s exactly what we’re seeing now. The good news is that this doesn’t represent a time to panic. Instead, the weakness is creating a spectacular buying opportunity.
I continue to expect a big rally here in the months and years ahead, so investors who have been waiting to get into this NexGen sector should jump on the chance to do so now at bargain prices. Weathering this volatility will be well worth it over time.
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