Commodities from oil to sugar are rebounding on hopes for a U.S.-China trade deal, but investors’ positive mood hasn’t extended to one group of former market darlings: metals used in rechargeable batteries.
After more than doubling from 2016 to early in 2018, prices for two of the materials used in the batteries that power smartphones and electric vehicles have extended a monthslong slide and are now down more than 50% from last year’s peaks.
While analysts had previously expected demand for lithium and cobalt to outstrip supply, a wave of new output and falling electric-vehicle sales in China have dented sentiment in the small, volatile sector.
The reversal has hurt shares of cobalt producers such as Glencore PLC and China Molybdenum Co. and lithium suppliers Sociedad Química y Minera de Chile S.A. —known as SQM—and Albemarle Corp. Some companies are curbing output to stabilize prices.
Despite hopes that an improving global economy will lift commodity demand, analysts expect the supply of battery materials to exceed demand in the next few years. The tumble highlights the risks of investing in areas of the market that are tied to nascent technology and heavily impacted by policy changes, analysts say.
“I don’t have any trouble getting meetings, but no one is buying,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors. “Nobody wants to jump in now and have it fall another 30%.”
An index of lithium prices compiled by Benchmark Mineral Intelligence has fallen for 19 consecutive months and is down 29% for the year. Cobalt has declined 36% in 2019 even after a recent rebound, figures from Metal Bulletin show.
Nickel, another metal crucial for batteries, entered a bear market Wednesday, falling 20% below a peak hit in early September.
The slide comes with some investors embracing other risky areas of the market that can offer greater returns. Other commodities and shares of companies based in emerging markets have rallied since the world’s two largest economies made progress on a trade accord in mid-October.
That hasn’t supported lithium and cobalt, largely because many analysts expect persistent surpluses. Citigroup projects supply of both lithium and cobalt to match or exceed demand each year through 2023.
“A lot of the price gains we saw in 2017 [and] 2018 were not justified,” said George Heppel, an analyst at commodity research firm CRU. “The investment [in supply] that needed to be made in the market has been made, and I don’t see us returning to those levels anytime soon.”
And falling electric-vehicle sales in China—the world’s largest market, it accounted for 60% of the global total last year—have curbed some past wagers on soaring consumption.
In recent months, the Chinese government has told cities that had imposed limits on gasoline-vehicle purchases earlier this year to loosen the regulations in a bid to spur more auto sales. It has also slashed subsidies on electric vehicles and is expected to discontinue them next year.
“The change to subsidies was a lot more drastic than a lot of people expected in the market,” Mr. Heppel said.
The declines in China have offset some of the optimism surrounding commitments to increase electric-vehicle output by auto makers such as General Motors Co. and Volkswagen AG .
While many analysts still project long-term increases in consumption of battery metals, some say that a bearish outlook for the next few years has dictated market momentum and forced companies to adjust their production plans.
In August, commodities giant Glencore said it would suspend operations at a giant copper and cobalt mine in the Democratic Republic of Congo by the end of the year. The decision temporarily boosted cobalt prices, though they have started falling again in recent days.
Balancing the lithium market could prove tougher because there are abundant supplies in South America and Australia, analysts say. Shares of SQM and Albemarle are down 44% and 32%, respectively, in the past year. Smaller producers have also slumped.
“We are and will be dealing with the challenging market conditions for the next 12 to 18 months,” Albemarle CEO Luke Kissam said on the company’s earnings call earlier this month. “There’s an oversupply in the market.”
Earlier this year, the Charlotte, N.C.-based company said it would delay work to lift its lithium processing capacity by about 125,000 metric tons. - wsj.com -