How To Invest In ASX Lithium Shares

ASX lithium shares are shares in Australian publicly listed companies involved in the exploration, mining and processing of lithium, a valuable mineral commodity.

Global demand for lithium has increased significantly in recent years, driven by the electric vehicle (EV) market. Lithium is a key component in lithium-ion batteries used in computing devices and EVs, which could account for 60% of new car sales by 2030 as the world seeks to rapidly reduce carbon emissions to address climate change.

Analyst and CFA Max Vickerson, who covers the energy sector for Australia’s largest stockbroking firm Morgans, said lithium stocks give investors exposure to some of the upsides of the shift to a decarbonised economy.

“The EV industry isn’t the only aspect of that shift but it is a very important and profitable part for resource companies,” Vickerson said.

EV adoption has dramatically lifted global production of lithium—it’s more than doubled since 2016. Australia produced more than half of the world’s lithium in 2021 with a record 55 kilo tonnes produced. That figure is expected to keep rising, and the lithium sector is forecast to contribute $9.4 billion in revenue to the Australian economy by 2024.

Lithium commodity prices have declined considerably in early 2023 after surging over the last few years, largely driven by a drop in Chinese EV sales and growing lithium supply.

Related: ASX Stocks to Watch

ASX lithium shares represent a range of companies, primarily focused on finding and extracting the raw material as well as processing.

“The majority of lithium companies on the ASX are hard rock lithium miners or explorers. Some companies also produce lithium from brine,” Vickerson told Forbes Advisor.

“A number of companies are also investing downstream to upgrade the processed ore into lithium chemicals suitable to be used for batteries.”

Some Top Performers

Vickerson noted three strong performers on the ASX: Liontown Resources (LTR), Mineral Resources (MIN) and Pilbara Minerals (PLS).

Of Pilbara Minerals, which runs one of the world’s largest hard-rock lithium operations, Vickerson said: “The share price has increased over 25 times its level at early March 2020 and the company is now producing billions of dollars in free cash flow.”

Other commonly traded ASX lithium shares include Rio Tinto (RIO), Core Lithium (CXO) and Lake Resources (LKE).

Investing in ASX lithium shares can be an effective way to diversify your portfolio and grow your wealth while supporting sustainability.

Max Vickerson said that while a large number of lithium stocks had performed well over the last three years, conditions had changed recently.

“Over the last year however the gains have slowed across the industry and there have been multiple periods of volatility as concerns about the balance of supply and demand have reared up from time to time.”

He said lithium commodity prices were the biggest factor affecting equity prices.

“Most companies sell a significant portion of their product under contracts so the average realised prices are not as volatile as spot markets,” he said.

“However, spot prices have been softening on seasonally weaker Chinese demand which has been a headwind for equity prices recently.”

Positive Signs for the Value of ASX Lithium Shares

The pressure on governments and companies to create a low-carbon economy is real, and increasing, as the effects of climate change become more obvious.

Globally, regulations and supply chains are likely to be reshaped by a transition away from fossil fuels. Mc Kinsey forecasts that demand for lithium-ion batteries will grow at an annual compound rate of around 30% over the next decade.

A rapid transition to electrification and new energy storage technologies requires secure and reliable access to lithium, which bodes well for lithium miners and especially those operating in a politically stable country like Australia.

Potential Risks to ASX Lithium Share Prices

If global demand for lithium or EVs wane, the commodity price can decline rapidly. In particular, since the majority of EV manufacturing is concentrated in the Chinese market, and most Australian lithium is exported to China, any changes in policy direction or EV demand in China will be disruptive.

The value of lithium as a commodity could also be weakened by advances in extraction methods or new discoveries of lithium deposits that increase supply, or new technologies that don’t require lithium.

Cost of production and long timeframes between mining exploration and production could also hamper the prospects of some lithium companies if the demand is not there when their supplies reach the market.

Related: How to Buy Stocks and Shares in Australia

You can buy ASX lithium shares by:

• Engaging the services of a full-service stockbroker who can provide advice on which stocks to buy and execute your trades, or
• Directly purchasing individual shares in lithium companies listed on the ASX, or an exchange-traded fund (ETF) that includes lithium stocks, via a regulated online share trading platform.

Before choosing which stocks to buy you should research the companies to get a clearer picture of their long-term production and earnings potential. Also consider how investing in certain stocks aligns with your financial goals and budget, investment strategy and timeline, and risk appetite.

While the value of lithium has been declining due to an evening out of supply and demand, there’s a general belief that in the long-term commodities like lithium will continue to be in demand as a means to decarbonise energy systems.

Shorter-term, Max Vickerson thinks lithium share prices will normalise, and is expecting good performance from Argentinian lithium miner Allkem (AKE), which is listed on the ASX.

“Share prices have been falling, following Chinese spot lithium prices lower. We expect lithium demand to increase as production ramps up following the Spring Festival which should stabilise prices.”

“We’re looking closely at Allkem in the next year as we anticipate strong production growth from its Olaroz facility.”

Of course, not everybody is lining up behind lithium stocks, with some viewing the sector as over-valued. Recently the industry has attracted the attention of short-sellers—those who bet stocks in certain companies will go down and profit from any dips— with the likes of Core Lithium, Liontown Resources and Sayona Mining in their sights.