The Drop in Lithium Stocks Is Good News for EV Investors

Andy Snyder|February 22, 2023

This is how a market is supposed to work.

And, oof, it’s China that’s leading the way.

Investors who didn’t follow our advice are getting burned after a major EV battery maker announced it is significantly discounting its product.

Shares of some of the most popular lithium miners plunged by double digits last week as Chinese firm Contemporary Amperex Technology (CATL, for short) told the world it would sell its products at a significant discount.

The price of its batteries will now be based on two figures. Half of the price will be weighted to the spot price of lithium – currently $64,000 per ton. The other half will be based on a fixed price that puts lithium at just $30,000 per ton.

The average of those two prices will determine what buyers will pay for batteries from one of Asia’s leading producers.

It’s trouble for the industry. Most companies would lose money selling batteries at those prices.

CATL can get away with the move because it owns the lithium mine that feeds its battery operations. It can lose a few points of margin in one business because it can gain them back (plus market share) in another.

It’s old-fashioned vertical integration… the stuff the EV market needs if it’s going to thrive on its own.

Free Market Power

While the news isn’t great for most of America’s producers, it is exactly what’s needed. This is the sort of free market juggling that creates real industries – ones that aren’t reliant on government handouts or subsidies. The EV sector will no longer depend on come-and-go tax credits that are doled out at the whim of the party in charge. These moves are permanent and will ultimately define the mechanics of the market.

Many industry insiders believe the trend will spread across the lithium market, ultimately sparking a price war.

But it won’t affect just popular lithium miners like Lithium Americas (LAC) or Piedmont Lithium (PLL). Because of the critical importance of batteries and the margin-crunching nature of the move, major manufacturers like Tesla (TSLA) and China’s Nio (NIO) will also feel the pinch.

It’s good news for consumers. Prices will shrink. EVs will become competitive with their gas-burning counterparts. And it won’t be because of government intervention.

It’ll be because of the free market and its immense power.

For investors, the rewards will lie in both the luxury EV makers that don’t get sucked into the price war (here’s one) and the vertically integrated manufacturers.

Right now, there aren’t any of the latter.

And as long as lithium mining stocks are outrageously priced, there’s little chance of a big acquisition creating one.

It’s more good news for CATL… and more reason for Washington to stop subsidizing the industry.

Let it work things out on its own and we’ll see a strong, healthy market in no time.