Are institutional investors missing out on lithium investments?

Lithium’s status as a darling of the energy transition narrative is under increasing scrutiny. Prices have plunged from their COVID-era highs, the market is awash in new supply, and geopolitical trade barriers are reshaping the competitive landscape.

Forstrong Asset Management’s lead portfolio manager, David Kletz notes these shifts signal both danger and opportunity for investors who may be eyeing lithium’s long-term potential.

Kletz sees lithium as a compelling long-term investment theme, tightly linked to sweeping global shifts such as electrification grid modernization, and the rise of electric vehicles. But he also sees the lithium market as being caught between long-term optimism and short-term pain. After a dramatic run-up during the early 2020s, prices have since collapsed, erasing nearly all the post-COVID gains.

“They had a boom period and they've since basically given up all of that,” he said. “In terms of momentum, the acute phase of that sell off is seemingly behind us. Charts can change direction at a pin drop but the trend is still lower.”

Additionally, China’s entry into the market with lower-cost production techniques has disrupted traditional supply dynamics as Chinese producers can manufacture lithium carbonate from US $8,000–US$10,000 per tonne, far below the US$12,000–US$15,000 range faced by Australian spodumene operations. This cost edge has allowed Chinese firms to flood the market while remaining profitable, putting significant pressure on competitors.

“Undoubtedly, Western manufacturers are watching what the Chinese are doing, and they're going to attempt to reverse engineer the success that those Chinese battery makers have had in making superior battery stacks,” added Kletz. “It’s not something that gets switched overnight but when that happens, you'll see another wave of heightened interest in electric vehicles in the West.”

Demand for electric vehicles has fallen short of expectations. Although EV sales are still increasing, growth has slowed markedly, from 35 per cent in 2023 to just 18 per cent in 2024.

Economic uncertainty, notably around the ongoing trade war, uncertain political electrification policies and growing consumer interest in more budget-friendly hybrid models are major factors behind the deceleration, explained Kletz.

However, according to recent stats, global demand from lithium is expected to surpass 1.4 million metric tons of lithium carbonate equivalent, a growth of 53 per cent, compared to 2023.

Moreover, they cite that increases in battery demand for electric vehicles will be a strong driver of lithium consumption in the next decade

Kletz acknowledged that bullish forecasts for lithium demand have largely been driven by two sectors: the growing need for energy storage in upgraded electrical grids and the widespread adoption of electric vehicles.

These use cases rely heavily on lithium because of its unique material qualities, lithium being “relatively lightweight and very energy dense,” he noted.

Driving this reversal is a surge in supply. Australia, for instance, has rapidly transformed from a mid-tier player into the world’s top producer, thanks to a wave of investment. Kletz also pointed to the emergence of technologies like direct lithium extraction (DLE), which could unlock previously uneconomical reserves in the US.

“This just adds to supply. It also makes the lithium market more diversified from a global standpoint,” he said.

Yet, Kletz raised a critical question. With so much capital flowing into lithium, could it be replaced? He’s closely watching developments in sodium-ion battery technology, particularly from China. While the materials used in sodium-ion batteries are cheaper and more abundant, the trade-off is significant.

“They have much less energy density than lithium,” he noted, adding that sodium-ion batteries would have to be larger and heavier to deliver comparable performance, something that makes them less viable for electric vehicles, where weight and space are at a premium.

Still, he acknowledged that sodium-ion could “potentially displace some demand for lithium-ion at the margin,” but he doesn’t see it as a major threat just yet. He acknowledged growing interest in alternative technologies like sodium-ion batteries, which some Chinese firms continue to develop. These batteries use cheaper, more abundant materials, raising questions about whether lithium could eventually be displaced. But Kletz believes lithium still holds the upper hand.

“Sodium-ion can potentially displace some demand for lithium-ion at the margin, but lithium-ion is still the king in terms of high-end batteries,” he noted.

On the demand side, lithium still benefits from structural tailwinds. Notably, the global push toward electrification, battery storage, and electric vehicles. But Kletz noted that prices remain highly sensitive to external forces such as EV subsidies and fluctuations in Chinese consumer demand. Additionally, the “the prices can be quite volatile in response to those things,” he said.

Despite China having a massive grip on the global battery market, as Kletz pointed to BYD and CATL as major players in both vehicle and battery manufacturing, this dominance is also becoming a liability amid escalating trade tensions as he noted the US is leaning on all of its partners to take more of a hawkish stance on trade with China.

While EVs tend to dominate the lithium conversation, Kletz sees battery storage as the more critical area in the long term, particularly for national infrastructure. He drew a comparison to earlier hesitations around 5G hardware, where many countries were wary of integrating Chinese-made components.

“The rest of the world has a lot of catching up to do to catch up to China and maybe that's not realistic over the near term. But I think competing battery manufacturers outside of China has a big advantage to displace some of China's market dominance by building out and refining capability for lithium,” he noted, pointing to US grid operators, for example, who might be more inclined to choose Canadian batteries, especially if Chinese alternatives become more expensive due to tariffs or trade restrictions.

Kletz suggests it may not yet be the right to time re-enter the lithium market, at least for now. Despite the long-term potential, he’s hesitant to make any moves while prices remain under pressure.

“I would want to see a bit more of a stabilization before dipping my toe back in,” he said. “I think we’re close to it but it would pay to wait a little bit.”