With the electric vehicle boom lithium was expected to become the world’s most desirable commodity, but for now the stocks of lithium mining companies are mired in a slump as the price falls.

Shares of Albemarle, the world’s largest lithium miner, closed Friday at $170 down 37.9% from a year ago. Livent shares plunged 39.9% to $18.4. Both U.S.-based companies underperformed the sector average. The Global X Lithium & Battery Tech ETF, which tracks the stock price of lithium miners and battery makers, fell 17.5% in the same period.

Stocks fell as the price of lithium fell. The mineral reached an all-time high in November 2022 triggered by disruptions following the pandemic. When the market normalized, prices sank more than two-thirds and dragged down industry stocks. Despite the poor performance of shares in recent months, sector fundamentals are solid as demand for lithium continues to grow on the back of electric vehicles.

"The prices have fallen from excessive levels that were becoming a serious problem for the battery industry," said Pavel Molchanov, equity research analyst at Raymond James & Associates. "Companies in the industry consider the level of prices right now very good." 

At its peak, the lithium spot price was above $80,000 per tonne; last Friday it was at less than $24,500 on the Shanghai Metals Market. The all-time high was due to fears of a shortage. Several lithium projects were suspended during the pandemic and that slowed supply expansion, while demand continued to rise, Molchanov explained. Once it became clear that there would be no shortages, the price plummeted.

"We know that demand for lithium continues to grow. That is obvious," Molchatov said.

More than 70% of analysts have a buy rating for Albemarle, Livent, and Allkem, according to data compiled by Bloomberg. Over 12 months, they foresee an average share price gain of 58% for Albemarle, 93% for Livent, and 42% for Allkem.

Australian lithium miners also fell over the last 12 months but performed better than American ones: Pilbara Minerals shares fell by 6.7% in U.S. dollar terms while Allkem shares fell by 11.9%.

The difference in performance between the Australian and American companies' shares is due to the type of deposit each company mines, said Chris Berry, president of House Mountain Partners. While Pilbara Minerals and Allkem focus more on spodumene lithium, as the hard rocks from which it is extracted are known, Albemarle and Livent are mainly focused on brine lithium. Although hard rock mining costs are higher, it is also more reliable, Berry said.

"It is traditional mining. Investors are more confident than they are in relation to brine, which is a really complicated chemical operation," he said. "And Australian investors are more bullish about the long-term prospects for lithium than American investors."

A small and volatile industry

For Shaariq Khan, a retail investor from Phoenix, Arizona, betting on lithium requires a long-term view. He bought Livent shares in 2016 when it had not yet been spun off from FMC, its parent company.

"This has been, by and large, a buy-and-hold strategy. I believe the direction the world is turning lends to becoming favorably dependent on lithium," Khan said. "Short-term volatility is irrelevant to the momentum that lithium is generating for long-term prospects."

Khan considered investing in SQM, the world's second-largest lithium company, but ruled it out because it is based in Chile and there were risks he did not understand, linked to regulations and politics. He also evaluated Albemarle but dismissed it because it was a more diversified company and he wanted to bet on a company focused only on lithium.

Patience may pay off for investors like Khan. As in the past, fears of shortages could soon boost lithium prices again and send industry stocks soaring.

A report by BMI, a research unit of Fitch Solutions, released in early September warns that a lithium shortage could materialize as soon as 2025. This is mainly due to the growth in Chinese lithium demand for electric vehicles, which BMI projects at 20% per year, while the country's production will increase by only 6% per year. China is currently the world's largest lithium producer.

Despite the long-term optimism, Berry does caution that there could be unexpected moves in the lithium market. He believes that the spot price of lithium could continue to fall in the short term and drag industry stocks down further. However, he points out that $20,000 a tonne - 18% less than the current price - is a floor, because below that value some mines will have to close, which would again push the price upwards.

"The lithium market historically has been small, opaque, and inefficient," Berry said. "We are going to see a lot of volatility."