ASX shares involved in lithium production continue to be popular, and for good reason.
Analysts at Wilsons reckon demand for the element will expand six- to eight-fold by the end of this decade.
"We don't believe lithium supply can keep up with this level of demand growth," equity strategist Rob Crookston said in a memo to clients.
"Lead times for lithium mines (from discovery to production) can take 5+ years, so there is no quick fix."
With the rising popularity of electric cars and other innovations that require powerful batteries, the Wilsons team is forecasting potentially "large supply deficits from 2025 onwards".
"While we expect the price of lithium to fade over time, the forecast price profile seems inconsistent with the forecast supply/demand balance," said Crookston.
"We believe there could be significant upside to the forecast long-term price if there is a supply-demand imbalance and the current price profile looks too pessimistic."
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'Significant upside' to this company's earnings
So which ASX shares is Crookston's team buying to invest in this thematic?
The memo mentioned four stocks, but out of them Allkem Ltd (ASX: AKE) is Wilsons' "preferred" exposure.
The analysts cited the company's position as one of the world's five biggest producers, processing three different forms — brine, spodumene and hydroxide.
"While we do not expect lithium prices to remain elevated at these levels over the next 12 months, we believe they will be significantly higher than consensus, which is currently pricing at ~US$36,000/tonne (vs. spot of US$73,500/tonne)," said Crookston.
"If this is the case, there should still be significant upside to Allkem's earnings, leading to analyst upgrades."
The Wilsons team also likes the geographic diversity, with operations spread out in Australia, Argentina, Canada and Japan.
Its dominance in the market could also see it attempt some takeovers.
"We believe consolidation is likely in the pipeline for Allkem, one of the biggest players in South America's 'Lithium Triangle'. The company could acquire smaller explorers to increase its capacity."
Three more lithium stocks to buy
Pilbara Minerals Ltd (ASX: PLS) is a pure play lithium producer that the Wilsons team also likes.
"Spodumene production is expected to increase to ~1 million tonnes by FY28, up from 360 kilo tonnes in FY22."
Moreover the analysts named IGO Ltd (ASX: IGO), which extracts and processes several different commodities involved in green energy, such as nickel, copper and cobalt, as well as lithium.
Perhaps Wilsons' stock recommendation that is least specialised in lithium is Mineral Resources Limited (ASX: MIN).
"Diversified exposure to predominantly lithium and mining services, as well as (low quality) iron ore," said Crookston.
"A speculated NYSE spin-off of the lithium business could untap hidden value in the business."
