In every technological revolution, stocks that lead the revolutionary/transformation change have front-run the potential that it offers. In other words, the leading stocks made quantum leap in their share prices well ahead before their full potential is realised and well before the delivery of the age of revolution.
Age of the Internet
Cisco was the poster child of the age of the Internet, saw its stock gains leaps and bounds and spearheaded the dot.com boom and later bust.
When the stock busted along with the dot.com era, it wasn't the case that Internet suddenly became irrelevant or stopped growing. In fact internet as we know it became the mainstay and an integral part of our society- it became even more relevant but Cisco never scaled back up to its peak again.
It was because as time progressed, there was more competition and for mass adoption, it had to become cheaper as supply expanded and the monopoly was over for Cisco.
Age of the Solar Energy
2007-08 saw the advent of the solar energy via solar panels, and solar panel companies became the rage of the period. First Solar's stock rose significantly just as Cisco did at the early innings of the revolution. But the exuberance died down as the industry soon became saturated with more solar panel manufacturers with equally advanced technology. FSLR never did recover back to its 2008 peak, but solar energy panel is widely used/adopted globally today.
Age of the Electric Vehicle
And just like Cisco and First Solar examples, Tesla has been the poster child for the Electric Vehicle (EV) revolution. More than a decade later, EV has finally becoming the new normal in consumer transportation. It has more to grow, that is without doubt. But since mid 2023, the EV landscape has become significantly competitive, with industry price cutting becoming the norm and the birth of many EV makers especially in China. Looking in retrospect in TSLA stock chart, we could say with some confidence that end 2021 was the peak in Tesla's valuation and that all EV stocks have fallen in tandem. Similar to Cisco and FSLR, EV stocks have front-run their potential and that the EV stock boom has possible ended and never to be revisited. Because the landscape has similarly changed to herald new competition and supply as the industry starts to mature.
And because lithium's prospect is substantially beholden to the EV fortune, we see a similarity in the lithium industry which has now entered a period of consolidation; with new supplies coming onstream in the years ahead, EV consolidation, new battery technologies in progression and EV growth substantially reliant on EV maker's capability to produce and sell their EVs at a competitive price (equivalent to ICE) for mass adoption, therefore needing battery and battery minerals including lithium to stay reasonably and sustainably cheap, the days of US$7000-8000 Spodumene prices are over. Which also likely mean lithium stocks will struggle to return to their former peak prices.
The Age of Artificial Intelligence (AI)
...now we come to NVIDIA which could be in the mid innings of its stock valuation, but just like all the tech revolutions before it, we ought to map the prior lessons and conclude that NVIDIA and all the AI stocks are also now front-running their potential. It won't be long before the Chinese and/or more American companies are able to match NVIDIA, new supply will soon crowd-out the leader's (NVIDIA) first mover advantage.
..so AI stocks valuation would run supreme well before their delivery and well before the world even truly understand the magnitude of value added that the AI revolution would actually deliver. It may also disappoint current lofty expectations or their delivery and hence potential could be delayed by operational and regulatory hurdles that the market failed to sufficiently impute.
..What I am showing you is that for every bubble and revolution, the stocks that front run their eventual potential due to first mover advantages would eventually succumb to new competition and supply and new technology that would eventually diminish their stock price/valuation. And their peaks never again revisited.
..so just because we recognise that the future of EV (and by association lithium) and AI is bright ahead, we ought not to jump to the conclusion that those EV (and by association lithium) and AI stocks would be similarly bright well into the future. Instead, evidence points that as they become more accessible for mass adoption, the monopoly over pricing would diminish significantly and the super normal profits that underpin their early supreme valuation would also have ended, and along with it, their historically high stock prices.
...from what has transpired,
1) EV growth is likely to be faster in China than in US/Europe
2) Chinese EV makers are cutting EV prices to spur domestic growth
3) Chinese EV makers are able to do (2) above because battery costs (and critical mineral prices going into it) have gone down significantly
4) Chinese EV industry has significant advantage over US/EU rivals is because they are well vertically integrated in entire supply chain- from control of lithium mines, lithium processing to battery making and EV production
5) China can and will suppress lithium and nickel prices to achieve its aim of reducing battery costs to produce unrivalled quality EVs at prices no car maker can match in US and EU.
6) That has led to US/EU car makers to step back from earlier EV all-in plans and forced Renault to send out an SOS letter to the EU to do something before China eats all their lunch.
7) Meanwhile, consumers in US have stepped back in early enthusiasm for EVs and pivoting towards hybrids (see Ford move)
8) If Trump wins presidency, he could reverse partially or fully Biden's IRA which provides subsidies for EVs, that could further stymie demand for EVs in the US.
Anyone betting on Li-Ion prices going up, or even staying flat.... it's likely going to be a blood bath - both for the big incumbents, and new entrants with a better mousetrap who aren't at scale.
..and Here's why I am not bullish or mildly bearish about lithium stocks prospects over the next 12 months or more
1. INDUSTRY ACTION. Watch the actions of lithium producers, not what they say. ALB the lithium industry leader has cut production plans, layoff workers, raised a billion dollars, all suggesting to expect a lithium industry consolidation mired by lower than production cost lithium pricing not to be transitory but to be more protracted. No large company would go to such extent if they expect lithium price to recover significantly after just a few months. And we have seen the same cutbacks across lithium companies in Australia, sharing the same sentiment.
2. EV GROWTH STALLING. When I mean stalling, I am not saying there is no growth, but high >50% growth has now dwindled to lower double digit growth. And the EV growth scene is different in China compared to US/EU. We've recently seen Tesla suffering a 8% decline in deliveries. EV growth in China comes on the back of price slashing which prompted price sensitive consumers to flock towards EV. And Chinese EV makers can only sustain such lower prices only because there is battery oversupply in China and critical minerals like lithium have fallen significantly. If battery costs move higher due to higher lithium prices ahead, it would make it more difficult for Chinese EV makers to sustain low prices and therefore demand growth could be equally compromised. No company would want to slash prices unless the industry is in such a dire state, so China's EV growth is nothing to celebrate for lithium's prospect because it is driven largely via competitive price cutting and on the back of low battery costs, which represent 30% of the EV cost.
3. NEW GLOBAL SUPPLIES. New global supplies are coming onstream from various parts of the world to challenge Australia's current dominance. Over the next few years, new supplies are coming out of Canada, US, Zimbabwe (China), Chile (US/China), Bolivia (China), EU. Original projections re: demand and supply would need to be re-assessed because original demand projections could be overstated and original supply understated. It is more likely there would be a surplus within the next 12 months at least but the surplus could actually widen if EV growth is stymied. Exxon has also stated that its planned 2027 lithium production could go ahead.
4. GEOPOLITICS has entered the EV space, not just semiconductors. Biden has indicated a China threat from EVs registering personal data that could be compromised while Trump has vowed to slap a 100% tariff on China EVs coming in from Mexico. Bottom line- US is scared shitless about the Chinese EV invasion into US soil, which Elon himself acknowledged could wipe out the US car industry. EU is also on the watch and would do everything to ensure that its all important auto industry is not jeopardised. All that could only mean that China's EV growth could be confined to largely in China and parts of Asia and we know China EVs account for the larger portion of the EV pie. Secondly, a Trump presidency could see parts of the Inflation Reduction Act (IRA) to be unravelled, including possible removal or dilution of EV subsidies. We have already seen EV subsidies been reduced in China (which led to price cutting) and in the EU (which led to an erosion in take-up).
5. HYBRIDS have taken the US market by storm, as Americans have become somewhat wary about being early in adoption of EV. Ford and GM have scaled back and deferred their EV all-in plans and are progressing towards hybrids. These moves only serve to reduce the potential for EV penetration rates to go higher as originally projected as Tesla would continue to focus on higher end EV market.
6. EVOLVING BATTERY TECHNOLOGY. China is moving at such a fast pace in its technological innovation in the EV and battery space that they're more likely to develop an EV battery that will deliver greater range and reliability at lower cost in a shorter time than everyone would expect. This may not be just sodium-ion batteries but newer ones that could limit the use of expensive lithium material. While this can just be conjectures, but we know that China can truly deliver battery innovation very quickly. China's interest is in producing unrivalled quality EVs at low cost, its interest is not in ensuring critical minerals like lithium prices go higher or stay higher; on the contrary, their interests would be best served by lower longer term lithium prices, and if they can't stay low enough, they would be more likely to accelerate lithium substitutes in EV battery technology. So given this, it is very unlikely for lithium prices to ever return to previous levels seen in the past 3 years.
7. EV GROWTH MAY NOT BE SYNONYMOUS WITH LITHIUM DEMAND & PRICING GROWTH
It is my belief that lithium demand and lithium pricing growth would not keep pace with global EV growth over time. Because less of it would be used per EV and lithium pricing could be capped to enable to the EV industry to achieve higher penetration rates - while Govts could increase the carbon costs for ICE vehicles to make them on par with EVs to promote EV sales, that won't be enough unless EV production costs can be reduced over time. And EV production costs can be reduced enough if it continues to rely on heavy lithium usage at high lithium pricing.
8. AUSTRALIA HAS NO VERTICAL INTEGRATION
Australian lithium has a major disadvantage because it has no vertical integrated industry. China's EV can be produced cheaply because it has access to its own lithium, lithium processing, EV battery production. US can rely on lithium produced in US in a year or two, the EU likewise, so Australia would have to export their lithium with no domestic customers. Add the higher cost of Australian production and the tyranny of distance to export markets, our lithium producers would end up being price takers, not price makers and have to contend with lower margins.
9. PROSPECT OF GLOBAL RECESSION.
If and when we have a recession, consumers would be hamstrung to buy basic necessities let alone expensive EVs or a change of vehicles. It would be more likely consumers would resort to buying 2nd hand EVs which are selling at steep discounts to their original prices. So, if and when we have a recession, that would put paid to EV growth, including in China.
