Investors were swift to dump shares of lithium producers Pilbara Minerals and Liontown Resources on Wednesday amid news that a major Chinese mine will restart production earlier than expected, raising concern that the rebound in the battery metal will be short-lived.

The suspension last month of production at Jianxiawo mine, owned by Chinese battery giant Contemporary Amperex Technology (CATL), had triggered a 70 per cent surge in prices for the white metal from a June low of $US575 a tonne.

Lithium stocks went on a tear last month after CATL, the world’s largest manufacturer of electric vehicle batteries, said that the lithium mine – which represents about 3 per cent of the world’s production and has become a focal point for the metal’s price – would be suspended for at least three months after it failed to extend a key mining permit.

However, CATL executives this week told employees to prepare for a resumption and to recall workers, according to Bloomberg. The news sent lithium carbonate futures on the Guangzhou Futures Exchange falling by about 5 per cent.

The news triggered a brutal sell-down in ASX lithium stocks on Wednesday, with Pilbara Minerals (PLS), Australia’s largest pure-play lithium company, falling 17.3 per cent to $1.99. Liontown Resources dropped 18.4 per cent to 78¢, IGO sank 14 per cent to $4.12, and Mineral Resources came off 6.3 per cent to $35.73.

Morgans deputy head of research Adrian Prendergast said the market reaction showed how “fragile” sentiment was in the lithium sector, with traders quick to react to signs of incremental supply changes.

“We continue to see long-term potential for a fundamental recovery in lithium, but are sticking to our cautious investment view that the recent rally had over-priced the short-term recovery upside,” he said.

“Investors should be mindful that lithium equities are likely to remain highly news-sensitive, particularly to Chinese supply signals, until clearer evidence of market balance emerges.”

David Franklyn of Perth-based Argonaut, who upped his exposure to lithium stocks in June, said traders had been hoping that some other Chinese lithium mines, which were due to submit licensing applications later this month, would also come offline if CATL’s Jianxiawo mine remained idled.

This, he said, would have exacerbated Wednesday’s lithium stock rout.

“The market right now is looking for guidance on supply and the Chinese market is opaque, so there’s a lot of volatility,” Franklyn said. “Lithium stocks have also had a good little run, so there’s a chance for profit-taking.”

PLS is the ASX’s third-most shorted company – which involves betting a stock will fall – according to the latest available data, with nearly 17 per cent of all shares outstanding. Mineral Resources is the sixth most shorted by hedge funds.

CATL’s mine, a key source of China’s supply of lithium, has been closely monitored by traders, who reportedly flew drones over the project last month as speculation mounted about its permit renewal.

Lithium prices surged this time last year when CATL suspended production at its project in Jiangxi, but swiftly reversed in February when the company announced it would restart the operation.

Source: The Australian Financial Review