Lithium stocks and ETFs to watch in 2023

If you've been watching the market throughout 2022, you've probably heard a lot about lithium.

After all, the price of the underlying asset has skyrocketed.

And with the switch to electric vehicles and renewable energy remaining a key investing theme over the next 3 decades, it's unlikely to slow down anytime soon.

According to Saxo Markets' Australian market strategist Jessica Amir, the sector might have a bright future ahead of it, even if it will remain volatile.

"Some lithium companies are trading at all-time highs. Like any sector, there can be volatility and market jitters from time to time," she told Finder.

"But the key is turning down the noise and thinking of the long-term outlook."

To help you break down this emerging sector, Finder and Saxo have teamed up to talk through the sector.

Why should you look at lithium?

Investors are adding lithium to their portfolios on the basis that we need a lot of the stuff.

Lithium is in many of the technologies used in everyday life. Whether it's electric vehicles, mobile phones, laptops, ebikes or even your electric toothbrush, chances are it contains lithium.

Add the fact that lithium is in short supply and it's not hard to see why investors might be bullish on the sector.

Amir highlights that the case for lithium remains strong over the long term, regardless of how it performs in 2023.

"The bottom line is that you have countries, governments and bodies pushing to make the world emission free by 2050, car makers are transitioning from fuel engines to EVs – with many making fuel engine cars obsolete," she says.

Adding to the transition are consumers who are likely to buy more ethical products.

The market strategist also notes that "lithium is inelastic in supply", meaning it's hard to bring supply to the market.

Meanwhile, demand is growing exponentially.

"The lithium battery market is projected to swell to $92 billion by 2025, with investment in next-gen vehicles to exceed $500 billion by 2030 from automakers," Amir notes.

"This is why the lithium market is tight (low supply, rising demand) and is likely to remain tight over the long term and has pushed up the lithium price to another record all-time high."

ETFs or individual stocks?

Amir points out that taking a basket approach to lithium stocks could be best for a long-term investor but describes the current market as "tricky".

This is due to how the ETFs are made up.

"ETFs in lithium and battery metals not only give investors exposure to commodities that are essential in electric vehicles – lithium, aluminium, copper and graphite for example – but also EV companies as well, like Tesla, VW, BMW etc," Amir says.

The catch with all this is that ETFs as a basket are underperforming pure lithium plays.

"The reason for this is when commodity prices rise (due to lack of supply and rising demand), that means costs rise for Tesla, VW and BMW," Amir explains to Finder.

"So investors need to think – do I want exposure to that? Or do I want to invest in companies that are selling their product at a premium and growing their earnings and selling it to the likes of Tesla and VW?"

On the other hand, she points out that some of the lithium producers are outperforming the market.

"Companies like SQM are up 95% this year (Sociedad Química y Minera de Chile S.A. [SQM] is the world's 2nd biggest lithium company).

"Another lithium stocks Albemarle (ALB), the world's biggest lithium producer… its shares are up 21% this year. The lithium price has soared and boosted their earnings," Amir says.

Will the macro conditions support lithium in 2023?

Much like most of 2022, lithium's fate in 2023 may hinge on the inflation rate and the price of the US dollar.

While Amir says inflation is overall cooling, (but points out oil prices may rise), the way commodities could be priced based on a second-order impact of inflation.

She points out the strength of the US dollar could be a determining factor for commodities including lithium.

"What's supporting commodity prices higher is the fall of the US dollar," Amir told Finder.

"Commodities are paid in US dollars. So the cheaper the US dollar is, the more a company can effectively buy, and that supports commodity prices."

As such, if the US dollar falls, it could mean commodity prices rise.

Either way, Amir says Saxo thinks the energy sector could remain resilient.

"We are bullish on energy in 2023 and see demand outpacing supply, this includes fossil fuels (as the world is not ready to be dependent on renewables) and yes we are bullish on lithium – given the long-term thematic will likely remain in place," she continues.

Some lithium stocks to watch in 2023

To help investors choose some lithium stocks, Saxo has its own empirical basket.

While this shouldn't be taken as financial advice and investors should do their own research, it does provide a snapshot into some of the lithium players on the market.

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