Is the lithium sector powering down?

Falling share prices and difficulty raising capital are the most obvious signs of a sea-change rolling through the lithium exploration and mining industry which rode a two-year spike in the price of the metal and is now being buffeted by a steep fall.Leading the dive is Core Lithium, an Australian company which exported a maiden shipment of lithium concentrate (spodumene) in April but struggled to last week complete a A$100 million capital raising to help pay for expansion of its Finniss project in the Northern Territory.Core's fresh funds came at a hefty discount with new shares being issued at A40 cents, 27% less than the price before the raising was announced earlier this month and 51% lower than the company's share price of four weeks ago.Rising supply and flat demand is at the heart of the lithium slowdown which has the hallmarks of what happened five years ago, the last time there was a sharp price decline with a compounding factor in 2018 sell-off being a much smaller market for EVs.In percentage terms the 70% fall in the lithium price over the three years to the end of 2021 could be repeated over the next two years if the latest lithium price forecasts from leading investment bank Goldman Sachs are correct.In a research note on Core published earlier today (August 21) the bank said its expected the spodumene price to fall by 38% from this year's average of US$5160 a tonne to US$3213/t next year, with an even steeper fall in 2025 when spodumene could be selling for US$860/t, an 83% collapse over two years.Other forms of the metal such as lithium carbonate and lithium hydroxide preferred by EV battery makers are also expected to crash with Goldman Sachs forecasting that both will fall by 82% over the next two years.China's evolving financial crisis which started with the collapse of a major property developer (Evergrande) and could soon claim an even bigger developer (Country Garden) has crushed consumer confidence in China, dulling demand for big ticket purchases such as apartments and EVs.A weekend story on the Bloomberg news service highlighted the EV glut which has suddenly developed in China with a spate of mergers between manufactures trying to cut costs while junk yards of old EVs which had limited travelling range littering waste land around major cities.Everything about lithium and EVs screams too far, too fast, with all facets of the industry tapping the brakes at the same time.Short sellers have been first to identify the change from optimism to pessimism with three of the top 10 most shorted stocks on the Australian market exposed to lithium.Core tops the shorted list according to a tracking website www.shortman.com.au with 10.74% of its issued capital sold short as at last week, a slight improvement on the peak of 11.33% shorted at the end of last month.Pilbara Minerals, an investor favorite thanks to its spectacular 1400% share price rise from A33c to A$4.69 over the past three years is the 6th most heavily shorted Australian with 7.9% of its shares short sold while its latest share price represents a fall of 12% on the A$5.37 of two weeks ago.Lake Resources is the 10th most heavily shorted Australian stock with 7.13% of its shares short sold, matched by a share price which has crashed by 80% over the past year after management revealed that its Kauchi project in Argentina would be six years late with a 2024 production target pushed out to 2030.The current lithium price correction, as happened after the last collapse, is likely to be reversed as governments drive a switch from fossil-fuel vehicles to electric power.But the sobering point about the earlier process of boom-and-bust, which is all too common in commodities in the early stages of their evolution is that it took three years for the recovery to start.Goldman Sachs sees similar timing this time around with a revival starting in in 2026 and steadily picking up speed as the fundamentals of supply and demand move back into balance.Morgans, an Australian stockbroking firm, examined the lithium correction last week with an upbeat observation that even though the market has softened faster than it expected most producers of the battery metal should remain handsomely profitable while developers faced the challenge of rising construction costs as well as the weakening lithium market.Falling lithium prices also represent a challenge for two emerging lithium miners, Liontown and Azure, which have rejected takeover offers made when the lithium price was higher.Liontown said it wasn't interested in Albemarle's proposed takeover price in May of A$2.50 as its shares motored past that offer to a June high of A$3.20 - but to now be back to A$2.62.Azure said no in July to an offer of A$2.31 a share from Chile's SQM on its way up to a high earlier this month of A$2.95 - but now back to A$2.74.If the lithium price trend seen by Goldman Sachs and other investment banks plays out the Albemarle and SQM offers might start to look more attractive, triggering a lithium miner ownership shake up - also repeating what happened after the 2018 price crash.

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