Image source: Sam Robson, The Motley Fool UK
The economic clouds are gathering and the UK is already in recession. That’s the conclusion of experts, including the Bank of England. That would be bad news for some stocks — but not necessarily all. I was wondering what stocks I might have in my portfolio that might be recession prone. For example, the demand for electric vehicles seems to be increasing. So I think lithium, which is used in many batteries, could see sustained demand even in decline. Could now be a good time to stock up on lithium stocks?
Long-term growth prospects
The long-term outlook for demand for lithium is strong. McKinsey forecasts that lithium carbonate equivalent demand is expected to increase eightfold between last year and 2030.
To feed that need, several things must happen. As existing mine operators Ganfeng Lithium To increase production, new entrants must start mining – or both.
An economic downturn could cause growth to slow, for example, as consumers spend less on new electric vehicles. But the long-term trend seems clear and I expect global demand for lithium to increase even in a recession.
Picking winners in an emerging industry
However, as for the fortunes of individual lithium stocks during a recession, I think the outlook is less clear.
McKinsey’s lithium growth potential projects could attract many new companies. This can lead to price competition, reducing profitability.
In addition, mining is an industry that requires a lot of capital investment even before commercial production begins. So companies can burn through cash and get little in return, such as falling prices if mining becomes economically unviable.
Some lithium stocks have been doing well lately. Atlantic LithiumFor example, it more than doubled last year.
But is that a foretaste of what’s to come during the recession?
Why not buy lithium stocks.
I think some lithium stocks could do well and help power my portfolio in an economic downturn. But the main question is which ones?
I think the answer is not clear. So, based on my investment principles, I’ve decided now is not the time to buy lithium stocks. I love proven business models. In general, I prefer to invest in companies that are competitive in such a proven business environment.
Sometimes I make an exception for that, for example, in an early stage industry. Lithium is at this level. However, the industry has attracted a lot of new entrants, as the global boom in lithium stocks shows. Long-term profitability prospects for most miners are unclear.
Although demand for lithium is expected to increase significantly, an economic downturn could cut the prospector’s cash flow. This may cause some mining companies to survive until they reach commercial production. It can also reduce the selling price. I prefer to focus on profitable companies operating in industries with proven demand and economics in a recession. I wouldn’t buy lithium stocks, at least for now.