Lithium prices surged following news that China's largest battery producer had its mining operations suspended, removing what analysts describe as a significant chunk of global supply from the market.

Speaking on Switzer Investing TV, fund manager Jun Bei Liu of Ten Cap explained the catalyst behind the sharp price movement:

"We have the largest battery producer... China has suspended its license because of its operations were not up to scratch."

The impact on global supply is substantia, she adds:. "That's 4% of the world's supply. That's massive," Liu noted, referring to the suspended operations.

The supply disruption comes at a time when lithium miners have been heavily targeted by short sellers, creating conditions ripe for a sharp price squeeze. As host Peter Switzer observed, there's "massive short interest in some of the Australian miners."

Liu explained that the Chinese government's action is part of a broader policy initiative to address overcapacity in sectors where "the competition has been so severe, it's actually killing the innovation. No one can make money."

Are we finally back?

The timing of the supply shock has amplified its market impact, coinciding with what Liu described as a restocking period when "demand is actually picking up" and "demand is actually not too bad."

The combination of sudden supply constraints and heavy short positioning has created what market watchers are calling a classic squeeze scenario. "This whole sector has been so heavily shorted by short sellers," Liu explained, noting that short levels "hasn't actually come off that much, even though they all had a massive rally in the last month or so."

The result has been significant pain for short sellers. "Now with this shutdown just means there will be a lot of pain," Liu said, adding "there might be more to come."

For investors considering lithium exposure, Liu highlighted the importance of balance sheet strength in the volatile commodity sector. Her preferred play remains Pilbara Minerals, which she described as "very clean, very leveraged" with "heaps of cash on the balance sheet."

Even at current lithium prices, Pilbara is "still sort of breaking even, less like, oh, you know, still losing bit of money. But it will get them through for the time being because they got so much cash," Liu noted.

The company has even indicated potential for capital returns "if they see stabilisation in the lithium prices," making it an attractive option for commodity exposure without operational risk.

The lithium price movement comes amid growing government support for critical minerals. Recent comments from Australia's resources minister about potentially guaranteeing prices for rare earths and critical minerals have added another layer of support to the sector.

Liu sees this as part of a global trend, noting that similar support is "already happening in the US" for critical minerals where prices have been "very, very low to make it even feasible for these guys."

While the current price surge has provided relief for beleaguered lithium producers, questions remain about whether this represents a temporary squeeze or the beginning of a more durable recovery.

The key factors to watch include the duration of the Chinese mine suspension, whether other producers maintain discipline rather than rushing to increase volume, and how sustained the apparent demand recovery proves to be.

For now, Liu characterized the move as "tradable," suggesting investors should treat it as an opportunity to reassess positions rather than assume a fundamental shift in the sector's dynamics.

The lithium story highlights the complex interplay between Chinese policy decisions, global supply chains, and financial market positioning – a reminder that in commodity markets, sometimes the most significant moves come from the most unexpected places.