Lithium powers ahead

Value Investor: Lithium powers ahead

• ALEX HUGHES
• 25 NOV, 10:04 AM

The rise of electronic vehicles has many important implications for the world.

One aspect is its impact on demand for resources, as the main fuel source powering transportation is likely to shift away from crude oil to lithium, the commodity contained within rechargeable batteries.
So what is lithium, who controls it and what is the outlook for the players involved?

What is it?
Lithium (Li) is a soft, silver-white coloured metal belonging to the alkali metal group of chemical elements. It is the lightest metal and least dense solid element on the periodic table. As lithium is highly reactive and flammable, it does not occur freely in nature, instead it only appears in compounds.

Despite recently captivating the minds of many, lithium is actually reasonably abundant in the world, with 20mg found per kg of earth’s crust, the 25th most abundant element. The largest producing deposits are found in the elevated regions of South America, contained in the salty brine of dry lake beds, however it is also hard rock mined in other regions such as Australia, China and Canada.
Lithium is extracted from brine using an electrolytic process, to produce lithium carbonate (48 per cent), lithium hydroxide (16 per cent) and other combinations for use in many commercial products and applications such as lubricants, aluminium smelting, pharmaceuticals, and increasingly, rechargeable batteries.
Following years of consolidation, the overwhelming majority (~85 per cent) of lithium supply is concentrated into just four hands: the South American based Rockwood, SQM and FMC Corporation and China’s Sichuan Tianqui Lithium.

The outlook for Lithium
Lithium currently trades for around $6,000 per tonne. We cannot give an exact price quote as there is no spot market, Lithium prices are posted by the producers and are subsequently negotiated directly with consumers. Over the 12 years from 2000 to 2012, lithium advanced from $2,000 to $6,000 per tonne, at a rate of 9.6 per cent per annum. Many industry observers expect the price to continue its upward trend at similar trajectories. Indeed, the major producers recently increased prices for battery grade lithium by a further 15 per cent.


A contributing factor to the rise in the lithium price has been the increasing use of smartphones and other devices that run off lithium-ion batteries. However, the future of lithium is set to be further influenced by its use in electric cars and power storage for the home. Roskill estimates lithium demand is growing at 11 per cent out to 2017, or 15.7 per cent on its optimistic forecast as demand for rechargeable batteries increases towards 50 per cent of total demand.


By 2020, the capacity of lithium-ion battery manufacturing is set to triple, led by Tesla’s 35GWh Giga factory in Nevada. It follows that lithium demand is likely to also triple over this longer period, with no signs of slowing thereafter as the second order effects of the increased supply ripple through the industry.
Assuming we take these demand forecasts as given, the important question then becomes one of supply. Can the world ramp up lithium supply to meet demand, or will the lithium price have to appreciate to reflect the imbalance?



Lithium Supply
The following chart is the global lithium supply curve according to Orocobre (ASX:ORE).


It seems the lithium supply question is not whether we can find enough, but rather whether we can expand current production capacity in sufficient time to meet demand. In 2009, an enormous deposit was found in the Uyani Salt flat in Bolivia, containing an estimated 95 million tonnes, enough for a 4.8 billion electric cars. However, despite its abundance, new production in the last 20 years has been harder to come by. According to Orocobre (ASX:ORE) , its Olaroz facility in Argentina is the only large scale, greenfield, brine based lithium project in 20 years, with production of 17,500 tonnes p.a. of low cost battery grade lithium carbonate.

As Argentinian-based producers currently command about 50 per cent of the market at the lowest end of the cost curve, it seems logical that they would be the most willing to expand supply. In the short term, new supply is only expected from Rockwood and Orocobre. Rockwood is seeking to expand its capacity by 20,000 tonnes p.a., however this remains subject to environmental approvals. Longer-term plans are for an expansion of an additional 30,000 tonnes by 2020.

However, as with many large-scale capital projects, timelines and budgets often become longer and larger than initially expected. It is for this reason that some observers expect demand to exceed supply by as early as 2018, which suggests there may be some upward support for the lithium price over the medium term.



Lithium Players
Investors who seek pure-play exposure must venture into the higher risk world of junior exploration companies, of which a number are listed on the ASX, including Orocobre Ltd (ASX:ORE), Pilbara Minerals (ASXLS), Neometals (ASX:NMT), Galaxy Resources (ASX:GXY) and Altura Mining (ASX:AJM), who all have some degree of lithium exposure in varying stages of development.

Meanwhile, the leading South American-based lithium producers Rockwood, SQM and FMC Corporation are all owned by New York Stock Exchange-listed diversified chemical businesses: Albemarle Corporation (ALB.N), Sociedad Quimica y Minera de Chile (SQM.N) and FMC Corp (FMC.N) respectively. We present a brief summary of these businesses below.

These options allow interested investors to get exposure to the lithium leaders with the added safety of US corporate governance standards and SEC regulation. However, their earnings diversity is a double-edged sword. For those investors seeking pure-play lithium exposure, you will not find it here, as revenue from Lithium operations makes up a small portion of their total. In that regard, Albemarle has the highest proportion from lithium, and hence its future is likely to be the most influenced by its success in lithium markets. For FMC Corp, with just 5 per cent, lithium will make a small contribution, but is unlikely to make or break the business either way.

http://www.businessspectator.com.au/article/2015/11/25/markets/value-investor-lithium-powers-ahead