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One of the most compelling bets on electrification in recent years is stumbling as the price of lithium falls from record highs, pushing investors to reconsider their bullish assumptions on energy storage.

The price of lithium has tumbled about 30 per cent since November, ending a stunning run-up since the start of 2021.

Stocks that provide exposure to lithium, which is key to the large batteries used in electric vehicles, have hit a rough patch as well.

The Horizons Global Lithium Producers Index ETF, a Canadian-listed exchange-traded fund that gives investors one-stop exposure to lithium stocks such as Pilbara Minerals Ltd. PILBF, Albemarle Corp. ALB-N, Mineral Resources Ltd. MALRY and Sociedad Quimica y Minera de Chile SA SQM-N, has fallen a total of 11 per cent this month – including a 5.6-per-cent decline on Friday.

Livent Corp. LTHM-N, the Philadelphia-based lithium compound producer and distributor, fell 10 per cent on Friday and 3.4 per cent on Tuesday – a small dip next to the 580-per-cent gain in the share price from March, 2020, to November, 2022, but a notable setback nonetheless.

“Lithium prices have gone up significantly over the past couple of years, so we would expect some pullbacks. I don’t think that changes the overall bullishness for the sector,” Nicolas Piquard, portfolio manager at Horizons ETFs Management (Canada) Inc., said in an interview.

Ben Isaacson, an analyst at Bank of Nova Scotia BNS-T, noted that Friday’s selloff in lithium stocks followed a report that an auction of lithium concentrate in China was cancelled amid concerns that prices will decline over the coming weeks.

As well, he said that Contemporary Amperex Technology Co., or CATL, a Chinese EV battery maker, wants to renegotiate with its suppliers to reduce its material costs.

“This is consistent with our thesis that the year ahead could be sloppy for the spot lithium market,” Mr. Isaacson said in a note on Tuesday.

Another possible reason for the pullback is that Bloomberg News reported that Tesla Inc., the EV manufacturer, may be securing its own lithium access through the acquisition of a Brazilian producer – raising concerns that automakers can weaken the pricing power for other lithium producers.

The case for investing in lithium-related stocks rests on soaring global demand for energy storage amid the rise of electric vehicles in China, Europe and North America, as governments try to cut greenhouse gas emissions.

The International Energy Agency expects that demand for lithium will rise sixfold by 2030, requiring the equivalent of 50 new mines.

These kinds of projections underpin the widely held view that the global supply of lithium will always be trying to catch up with rising demand, leaving a continuing shortfall that will reward investors.

But as recent stock market activity shows, volatility in the sector can pick up when there is any challenge to these bullish assumptions.

Mr. Isaacson expects that SQM – a Chilean stock that trades as an American Depositary Receipt in the U.S. market – can rally 25 per cent over the next 12 months.

His enthusiasm for the long-term prospects for the lithium sector rests on the idea that, while 2023 could see softer pricing for lithium as incremental production outpaces incremental demand, the outlook looks increasingly better further out.

“Beyond 2024, we are stumped as to where supply will come from to satisfy demand,” Mr. Isaacson said in a note in January.

Mr. Piquard said the fact that automakers are looking to secure their own lithium sources confirms that they are worried about the supply picture.

“Seeing these major auto manufacturers scrambling to get into the lithium market, even though lithium prices are up significantly over the past several years, paints a bullish longer-term picture,” he said.

Follow David Berman on Twitter: @dberman_ROBOpens in a new window

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