Is China responsible for decimating your ASX 200 lithium shares?

S&P/ASX 200 Index (ASX: XJO) lithium shares have taken a beating over the past week.

Here’s how the big lithium stocks have tracked since last Wednesday’s opening bell:

• Core Lithium Ltd (ASX: CXO) shares are down 12.6%
• Allkem Ltd (ASX: AKE) shares are down 10.5%
• Pilbara Minerals Ltd (ASX: PLS) shares are down 9.6%
• IGO Ltd (ASX: IGO) shares are down 11.5%

That sees the ASX 200 lithium shares trailing far behind the benchmark index, which has slipped a more modest 0.3% over the week.

So, what’s going on?

Is China responsible for pressuring ASX 200 lithium shares?

There are three broad reasons analysts are pointing to China for dampening the outlook for lithium prices and hence pressuring ASX 200 lithium shares.

First, Chinese authorities are continuing to enforce the nation’s COVID zero policies. And with new infections in China soaring to record levels, investors are concerned a new wave of lockdowns could slow economic growth in the world’s most populous nation.

Second, a growing number of Chinese citizens are fed up with what are now years of restrictions on their movements. And in recent days, unprecedented protests have erupted across a number of cities.

With China counting as the world’s largest EV manufacturer and a voracious consumer of lithium, this has dimmed the shorter-term outlook for lithium demand and seen investors selling some of their ASX 200 lithium shares.

Commenting on that impact, Colin Hamilton, managing director for commodities research at BMO Capital Markets, said (quoted by Bloomberg):

The Covid situation in China continues to weigh on metal markets, with record cases again announced over the weekend, together with the widely reported protests. We expect the renewed lockdowns to hurt market confidence into year-end, and thus delay some raw materials purchases over the coming month.

The third headwind blowing from the Middle Kingdom

The third headwind blowing from China and pressuring ASX 200 lithium shares is a slowdown in the nation’s EV sales.

EV sales in 2022 have to date almost doubled the number sold in 2021. But that trend looks to be reversing.

According to Bloomberg data, EV registrations in October were down more than 20% month on month.

The pullback is likely related to the winding back of Chinese government subsidies for EVs, which are meant to be phased out this year. And this comes amid news that Chinese battery manufacturers may have “overproduced” in recent months, meaning a temporary reversal of the supply and demand dynamics.

Susan Zou, Shanghai-based analyst at Rystad Energy, said (quoted by Bloomberg):

It’s likely for lithium prices to face some small correction until early next year. Battery makers need to destock while EV manufacturers are about to meet their annual targets. Meanwhile, they face elevated costs for raw materials and traditionally weaker consumption in the first quarter of the year.

All this is not to say that lithium prices, or the ASX 200 lithium shares, are likely to crash.

According to analysts at Morgan Stanley:

We see the near-term lithium market remaining tight, supporting lithium prices. However, we note that there is likely to be some price pullback when underlying demand for EVs starts to weaken sequentially, and industry players may become more cautious about placing orders and building inventory.

How have ASX 200 lithium shares tracked over a year?

Investors who bought into any of the ASX 200 lithium shares we mentioned above a year ago will still be sitting on some outsized gains, despite the recent sell-off.

Since this time last year, the Allkem share price is up 40%; IGO shares have gained 43%; the Pilbara share price has leapt 82% higher; and Core Lithium shares are up 145%.

The post Is China responsible for decimating your ASX 200 lithium shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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