After a spectacular bust, battery-metal lithium is showing tentative signs of life on speculation the retracement that convulsed the market last year has forced the conditions for a recovery.

The spot price of lithium carbonate in China - the key material used to power electric vehicles - has rebounded to the highest level since December following its 80%-plus collapse in 2023. On the Guangzhou Futures Exchange, meanwhile, the most-active contract has jumped by more than a fifth over the past month.

Lithium is a commodity that’s central to the energy transition given its role in batteries, but a global glut torpedoed prices last year as supply ran ahead of demand. Despite the tumult, major producers are keeping the faith, with No. 1 Albemarle Corp. maintaining that low prices are unsustainable, and No. 2 SQM plowing ahead with expansions as it holds onto a positive outlook.

The rout spurred some producers to cut output. Among them, Core Lithium has suspended some mining operations to reduce cash costs, citing the “significant decline” in prices.

“The lithium market is rebalancing, with industry curtailing production and projects,” UBS Group said in a recent report, while cautioning that a surplus remains. There’s been progress on the overall balance “but we highlight it could be transitory if price sentiment lifts too far, too fast,” it added.

In China, the industry is focusing on speculation that an environmental crackdown in a supply hub could spur disruptions, adding to Western cuts.

Not everyone is convinced about the rebound, however. The rally in lithium contracts “should not be interpreted as the end of the bear market,” Goldman Sachs Group said in a note. The surplus remains sizable, it warned.

At BloombergNEF, analyst Allan Ray Restauro was also wary. “The near-term price gains are likely immediate impacts of the environmental crackdown in China,” he said. Nothing explicit points to a sustained rally as, despite supply cuts and project slowdowns, supply will top demand, he said.