The metal is stirring investor excitement and a healthy dose of bubble fear .
At the start of this year, Tesla, the Silicon Valley electric carmaker launched the mass production of its vehicle batteries at a sprawling $5bn Gigafactory in Nevada. Meanwhile, the nearby city of Reno, once known as a poor man’s Las Vegas, is poised to welcome a new tech workforce, some 6,500 jobs by 2020, and an estimated $40bn in investment over the next 20 years. Already, the move has transformed Reno’s reputation and placed the city on the map as a viable business destination, says the chief executive of a local development organisation. “People look at us differently now,” he says. And it is not just Reno that is enjoying the Tesla effect. The average price of lithium, the raw material used to make electric vehicle batteries, has risen dramatically, up 60 per cent last year and threefold since 2014 according to an index by Benchmark Mineral Intelligence, stirring investor excitement and a healthy dose of bubble fear.
“From the point of view of the individual investor today, you have to be bullish,” says Jon Hykawy, president and director of Stormcrow Capital, a mineral wealth consultancy. He is among the many analysts who are predicting that electric cars will speed into the mainstream within a decade and ratchet up demand for the soft white metal along the way. With electric car and battery costs falling towards mass-market prices, and demand rising for lithium use in off-grid power storage, the market faces a global shortage. According to one estimate by Morningstar, the supply shortfall will grow to 100,000 tonnes by 2025 and demand for lithium will increase by 16 per cent each year until then.
Analysts are predicting that electric cars will speed into the mainstream within a decade and notch up demand for lithium Prices have moved accordingly. In China, lithium carbonate, one of the two types used in batteries, wildly outperformed expectations, soaring from $7,000 per tonne towards the end of 2015 to north of $20,000 per tonne within around nine months. Simon Moores, managing director at Benchmark, points to China’s support for green vehicles as a big driver of demand and notes recent attempts by the world’s biggest polluter to lock down lithium sources. “With nine of 14 lithium ion megafactories being located in China, it shouldn’t come as a shock that China is preparing for a battery powered revolution and is ahead of the game in locking up supply of key battery raw materials including lithium, cobalt and graphite.” However, unlike traditional commodities, there is no spot market for lithium and pricing can be opaque. While the “big four” producers — Albemarle, FMC, Chile-based Sociedad Química y Minera and China’s Tianqi Lithium — control a high proportion of supplies as part of wider portfolios, more direct exposure to lithium comes through the range of junior miners that are now staking claims across Australia, Canada and Nevada in the US.
Many have seen their shares rally. Since the beginning of 2016 to date, Australia’s Galaxy Resources and Pilbara Minerals have gained about 390 per cent and 50 per cent respectively; Lithium Americas is up 200 per cent. The Global X Lithium ETF, which tracks lithium miners, explorers and battery manufacturers, has returned about 34 per cent over the same period. But as in any rush towards a particular commodity, investors should treat new upstart miners with caution, says Edward Anderson, chief executive of lithium consultancy TRU Group. “Most of these lithium companies do not have any exploitable resources and have no chance whatsoever of ever coming into production,” he says, citing the challenge of producing lithium economically. “The Tesla hype is what’s driving the market, not the actual market.”
Andrew Shearer, senior resource analyst at equities research house PAC Partners, urges investors to seek lithium producers that are cost effective and actively lining up customers. “Investors are becoming educated in lithium assets and now looking at differentiating factors, such as a defined resource, estimated capital costs and time to production,” he says. For Hykawy of Stormcrow Capital, investing in lithium is tricky because it is not a rare material like gold with a scarcity value that means the price has a natural floor. Because of this, in such a small market — global demand stood at about 175,000 tonnes a year in 2015 according to Morningstar — he warns that undersupply could become oversupply if many big projects start activity. Given lithium reserves are plentiful, with still more to be tapped into, investors need to watch out for an inevitable price “correction”, he says. “What happens to your lithium story if and when that pricing bubble bursts?” he says. “If you are going to invest in this space it behooves you to invest in the best possible names, rather than the most speculative names, or to monitor your investments really closely and be ready to jump when things turn against you.” What is lithium used for? Ever since it was commercialised by Sony in the 1990s, the soft white element has been used in the batteries of most electronic devices. Demand is set to increase over the next five to 10 years as applications using lithium-ion batteries, namely electric vehicles and storage for grid power, gain popularity. Lithium is also used in glass, ceramics and lubricants. Lithium salts are used to treat depression. Why has lithium become the battery of choice? Lithium-based batteries enjoy high power density and negligible “memory effect”, where rechargeable batteries lose their capacity over time. Lithium enjoys the position of already being a dominant technology. Where is lithium found? Lithium is chemically extracted either from brine or hard rock. Global supplies are concentrated in Argentina, Australia, China, Chile and the US state of Nevada, with about 70 per cent found in the salt flats of Argentina, Bolivia and Chile. It is quicker to bring hard rock lithium to market, but low-cost supply is located in the South American brines.
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