The future of ASX lithium shares: Are investors looking through rose-coloured glasses?

This year has been astronomical for ASX lithium shares as many market watchers seemingly hope surging demand will continue to bolster the price of the battery-making material sky-high.

Despite posting notable tumbles yesterday, the share prices of some of the market’s favourite lithium stocks have rocketed in 2022. Take a look:

• Core Lithium Ltd (ASX: CXO) shares have soared 149% this year
• Those of Pilbara Minerals Ltd (ASX: PLS) have jumped 37%
• Stock in Allkem Ltd (ASX: AKE) has gained 27% year to date
• That of Sayona Mining Ltd (ASX: SYA) has jumped 68%
• Finally, the Liontown Resources Ltd (ASX: LTR) share price has lifted 17%

But a few wary voices are warning investors the lithium train’s meteoric gains might not continue as others predict. Could those invested in ASX lithium shares be looking through rose-coloured glasses?

Are fans of ASX lithium shares wearing rose-coloured glasses?

The seemingly continuous hype surrounding lithium might be clouding the real challenges in the material’s supply, according to Schroders head of Australian equities Martin Conlon. He points to two factors with the potential to weigh on the sector.

First, mining lithium is a carbon-intensive activity. Lithium is hard to come by in large quantities. As a result, a lot more mining has to happen to produce lithium than, say, iron ore.

That means electric vehicles might only reach true carbon neutrality after 100,000 kilometres on the road. Which leads to Conlon’s second point.

Policies designed to push uptake of electric vehicles faster than miners can produce lithium “risk being counter-productive”, he says. Conlon continues:

Stratospheric [lithium] prices are vastly higher than needed to incentivise new supply and are therefore difficult to rationalise on any fundamental basis.

Nevertheless, if governments insist on attempting to create additional (often artificial) demand assisted by subsidies to appease the voracious appetite for rapid climate action, there is an obvious possibility large amounts of global taxpayer money will be transferred to ‘green metal’ producers.

The wager in purchasing lithium and many other battery material exposures at present is firmly in the hands of ongoing ill-considered government intervention.

Could yesterday’s tumble be just the beginning?

Meanwhile, ASX lithium shares had a disastrous day on the market on Tuesday.

Of course, their tumbles might have had something to do with profit-taking. Word China will ease certain COVID-19 restrictions sent materials stocks soaring on Monday, boosting shares in some lithium favourites as much as 11.7%. Such gains might have proven too tempting for some investors.

Though, there may have been more to yesterday’s suffering than initially met the eye.

It might have been spurred by bearish sentiment from Goldman Sachs.

The broker believes demand for lithium will continue this year. However, it expects the market to slip into surplus from the second half of 2023, as The Motley Fool reports. Analysts reportedly forecast that lithium supply could be 40,000 tonnes greater than annual demand by 2025. That would likely be dire for ASX lithium shares’ balance sheets.

Additionally, according to Credit Suisse analyst Saul Kavonic, courtesy of the Australian Financial Review, the plunge might have been driven by falling lithium carbonate futures on the Wuxi Stainless Steel Exchange. Kavonic reportedly said the fall came amid news:

[A] major cathode producer might have slashed production targets and some Chinese firms [are] forecasting softening in the market later in 2023.

Still, plenty of brokers remain bullish on lithium. Macquarie, for one, recently tipped spodumene prices to reach US$6,500 a tonne.

The post The future of ASX lithium shares: Are investors looking through rose-coloured glasses? appeared first on The Motley Fool Australia.

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More reading

• Pilbara Minerals share price higher on maiden dividend news
• Why Allkem, Core Lithium, Flight Centre, and NAB shares are dropping today
• Here are the 3 most traded ASX 200 shares on Tuesday
• Why are ASX 200 lithium shares hitting the dirt on Tuesday?
• Why is the Pilbara Minerals share price tumbling 10% on Tuesday?

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Schroders (Voting). The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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