2023-07-29 02:41:53 ET
Summary
- Sociedad Química y Minera de Chile (SQM) is well-positioned in the lithium industry amidst increasing demand for electric vehicles and energy storage systems.
- A resurgence in price from the 50% Fibonacci retracement level, coupled with higher monthly and quarterly closings, suggests a strong bullish outlook.
- The price is meeting considerable support at the formation of an ascending broadening wedge.
Sociedad Química y Minera de Chile S.A ( SQM ), a significant player in the lithium industry, stands at a promising juncture amidst the escalating demand for lithium, spurred by the rapid growth in the electric vehicles and energy storage systems market. Government initiatives in the U.S. further enhance this surge. Despite short-term challenges, the long-term outlook for SQM remains bright. This optimism is underpinned by the global transition towards electric vehicles, robust governmental backing, and SQM's capacity to ramp up production. This article delves into a technical assessment of SQM's share price to discern its future trajectory and identify potential investment avenues for long-term investors. It appears that the stock price is rebounding from a durable support zone, thereby creating compelling buying opportunities.
Navigating Challenges to Harness the Lithium Boom
SQM has strategically established itself as a leader in the lithium industry. The surge in lithium demand is attributed to the increasing growth of electric vehicles and energy storage systems. This is bolstered by government initiatives, like the 2021 Infrastructure Investment and Jobs Act which allocated $7.5 billion for EV charging stations, and the 2022 Inflation Reduction Act which encourages consumers to buy EVs. With President Biden's target for EVs to account for over 50% of new auto sales by 2030, the future prospects for lithium companies, such as SQM, look promising.
Nonetheless, making investments in the lithium sector isn't a straightforward task. Despite the soaring demand, the law of supply and demand states that when supply surpasses demand, prices plummet, which can lead to a decline in a company's sales, regardless of overall demand expansion. Furthermore, operational costs associated with new mining projects can be astronomical, which can potentially put a strain on a company's finances. Additionally, the recent proposal by Chile to nationalize the lithium industry could also pose a threat to SQM.
SQM, though, appears well-prepared to navigate these challenges. Even with Chile's proposed nationalization, SQM boasts strong double-digit operating profit margins and a healthy cash flow to fund expansion while maintaining a low debt ratio. The company is betting on long-term lithium demand outstripping supply and has invested heavily to ramp up its production capabilities. SQM's Q1 2023 earnings report indicated around a 6% decline in net profits as compared to the previous year, driven by a drop in lithium sales volume. However, the management is confident of a swift recovery. Despite slight revenue and earnings miss against Wall Street expectations, SQM managed a marginal gain. A key driver of optimism was the management's bullish outlook for its lithium business, which contributes most of the company's total revenue.
The chart below provides a snapshot of SQM's overall profitability, showcasing the company's total revenue on both a quarterly and yearly basis. Despite a minor dip in revenue during the first quarter of 2023, SQM displayed robust revenue growth in the previous year, raking in a total revenue of around $10.71 billion. This slight decline in revenue at the beginning of the year doesn't overshadow SQM's robust profitability. The company's strong position is anticipated to persist, driven by the escalating demand from the electric vehicle and energy storage systems market.
Prospective Price Trends in the Long Run
The quarterly chart below paints a strongly bullish technical outlook. It reveals that the SQM stock price follows a long-term trading channel. This channel was disrupted in 2022 when prices skyrocketed to an all-time high of $103.82. Trading was particularly turbulent within the red channel, and when this threshold was breached, the stock ventured into new, higher-priced territory. Following this peak, a correction occurred, bringing prices down to a solid support point along the red channel line, at $56.92. Upon reaching this support point, prices bounced back, closing the second quarter of 2023 on a high. This was marked by a long candle wick, indicative of ongoing bullish momentum, suggesting that the trading value will continue to ascend. Thus, the price correction and rebound off the robust long-term support suggest a bullish future for SQM.
Crucial Considerations for Investors
To further elucidate the above points, the monthly chart below is analyzed to pinpoint key support and resistance market levels. The chart below shows that the price had dipped to $12.38 amid the Covid-19 recession before rebounding robustly. This surge post Covid-19 was attributed to the worldwide shift toward greener technologies, especially electric vehicles, whose demand skyrocketed during the pandemic. Lithium, a key ingredient in EV batteries, saw a surge in demand, benefiting producers like SQM. The global economic recovery and resurgence of various industries further fueled lithium demand, not just for electric vehicles, but also for other applications like electronics.
The Fibonacci retracement on the monthly chart, drawn from the low of $12.38 to the all-time high of $103.82, shows that the current SQM price drop is cushioned at the 50% Fibonacci retracement level of $58.10. A strong bounce-back from this point resulted in the monthly candle closing above the 38.20% Fibonacci retracement level. It is worth noting that the quarterly closing was also above the 38.2% Fibonacci retracement, implying a potential market acceleration.
The future outlook for SQM becomes clearer upon examining the weekly chart, where an ascending broadening wedge pattern emerges. Interestingly, the robust bounce-back from the 50% Fibonacci retracement coincides with the robust support of the ascending broadening wedge formation. This rebound verifies the bullish case for SQM and points towards the likelihood of increasing prices.
Investors may contemplate buying in the current support region, bolstered by indicators such as the 50% Fibonacci retracement level, the ascending broadening wedge's support, and the sustained trend line observed on the quarterly chart.
Market Risk
The demand for lithium, while currently high due to the growth in electric vehicles and energy storage systems, is not guaranteed to continue at the same pace. Any decline in the growth of these sectors or a breakthrough in alternative technologies could impact the demand for lithium, potentially affecting SQM's profitability. Moreover, the law of supply and demand states that when supply surpasses demand, prices plummet. Despite the high demand, an oversupply of lithium in the market could lead to a drop in prices and, consequently, a decrease in SQM's sales and revenues. Mining operations, particularly for lithium, are expensive. The high operational costs associated with new mining projects can potentially strain the company's finances. Unforeseen operational issues, including equipment failure, labor disputes, or environmental concerns, could further exacerbate these costs.
The technical analysis suggests a strongly bullish long-term outlook. Yet, the appearance of an ascending, broadening wedge underscores rising volatility. A price slump below $45 is unlikely, but such a situation could disturb the firmly bullish trend. Specifically, a monthly closure below this threshold would breach the ascending broadening wedge, the 61.8% Fibonacci retracement, and the quarterly support line.
Bottom Line
SQM appears as a powerful player in the rapidly expanding lithium industry, despite encountering diverse challenges. Its strategic alignment with the mounting demand for electric vehicles and energy storage systems, reinforced by government initiatives, underpins its capacity to negotiate this complex market. The firm's considerable profit margins, consistent cash flow, and commitment to enhancing production capabilities underscore its resilience, pointing to a radiant future outlook. The technical analysis depicts a robust market scenario, underpinned by the powerful support junction evidenced by the ascending broadening wedge support, the quarterly support line, and the 50% Fibonacci retracement level. This amalgamation of support levels underscores the strength of this juncture. Investors may contemplate entering the market at the current levels and maintaining a long-term holding to leverage the impending surge in SQM's stock price.
For further details see:
SQM: A Promising Long-Term Investment Opportunity (Technical Analysis)