The Strategist

Forget oil, lithium is a new big craze

03/03/2017 - 15:22

Tesla made electric cars trendy, and demand for batteries is growing rapidly. Manufacturers of lithium are celebrating skyrocketed prices. How soon will investors realize that there is plenty of lithium in reserve, and when will the growth of prices end?

Chemetall Foote Lithium Operation in Clayton Valley, photo by Doc Searls
Chemetall Foote Lithium Operation in Clayton Valley, photo by Doc Searls
Over the last eighteen months, prices for lithium have risen sharply due to growing demand for car batteries and smartphones. It looks like carmakers are first to be blamed here as the whole car industry gradually preparing to switch from gasoline to electricity.

Development of electricity storage technologies in the last 10 years enabled such a transition. According to forecasts, growth in popularity of electric vehicles will be the main driving force for lithium demand in the coming years.

Morgan Stanley’s report on electric vehicles comes to the following conclusion: "Although there are still many questions to the electric industry, we believe that sharp increase in compliance costs for existing internal combustion engines (ICE) encourages producers to change their attitude towards electric vehicles. Improvement of battery technologies has also played a role. Increasingly more manufacturers are announcing plans to launch electric vehicles available to a larger number of consumers, and we believe that estimated penetration of electric vehicles by 2025 can safely be increased to 10-15%, which is over than three times higher than current projections."

According to Macquarie’s estimates, Tesla, one of trailblazers of the "electric revolution", will need about 27 thousand tons of lithium carbonate annually to reach the target production level of 500 thsd. cars by 2018. Tesla Model S will require about 10 thousand times more lithium than an average smartphone.

Macquarie states that there are just four lithium producers controlling about 85% of world supply: SQM, Albemarle, FMC and Talison (49% stake is owned by Albemarle, and another 51% - by Chinese Tianqi Lithium). Basically lithium extraction of raw materials is carried out in Australia and South America, although there are several mines in the United States. Many companies, who need a regular supply of lithium, are concerned that the market is becoming more concentrated. The big players are trying to strengthen their position, which leads to oligopoly. The market is by nature becoming similar to OPEC.

However, active growth of prices encourages new market participants. Reuters report states: "Apparently, Tesla counts on new generation of lithium manufacturers. The company has signed supply agreements with Bacanora Minerals, which controls a mine in Mexico, and Pure Energy Minerals, develops Clayton Valley mine in Nevada. Interestingly, when the deal was announced, both manufacturers claimed that the raw material will be supplied at a price clearly below the current market, in accordance with Tesla’s intention to lower costs of their batteries." 

Sharp rise lithium price is reminiscent of a bubble in the rare earths market, which appeared a few years ago. Then forecast demand for some rare earth metals such as neodymium was extremely positive, given that they are quite popular among manufactures of LEDs and smartphones. Once China introduced a policy to restrict exports, investors got scared, and prices skyrocketed.

Shares of some companies such as Molycorp and US Rare Earth also incredibly increased in price. However, the take-off soon was followed by a sharp decline. Euphoria of investors dispelled as soon as they realized that volume of offers far exceeds the demand. Many companies such as FMC, Albemarle and SQM (three of the four major manufacturers) this year experienced a remarkable increase in shares after growing prices for lithium. Global X Lithium hedge fund has also been quite popular. 

The lithium market is opaque, and it’s nearly to assess its prospects. The market price may begin to stabilize and reach a peak at the end of the year, as predicted by Macquarie, but there is a chance for further growth. It is worth noting that the world's lithium reserves are quite high compared to the current consumption.