Every month I'm going to be running a feature looking alternative investments called 'Diversifying the Portolio'. This first post I will be looking at the commodity lithium.
Background:
Why have I chosen to look into lithium? If you’re reading this article then you’re almost certainly using a device powered by a Li-ion battery on a daily basis. Often used in watches and calculators the digital age is proving to be very hungry for these power sources especially as laptop and cellphone usage has increased. The real potential growth market revolves around the adoption of lithium as a major component in other types of battery such as in automobiles.
Demand:
Lithium has a very wide range of applications, according to the USGS global end-use markets are estimated as follows: ceramics and glass, 31%; batteries, 23%; lubricating greases, 9%; air treatment, 6%; primary aluminum production, 6%; continuous casting, 4%; rubber and thermoplastics, 4%; pharmaceuticals, 2%; and other uses, 15%. It’s interesting to note that batteries are not yet the main use for lithium and it has many suitable substitutes in these other applications. Examples are calcium and aluminum soaps as substitutes for stearates in greases and sodic / potassic fluxes in ceramics and glass manufacture. Lithium carbonate is not considered to be an essential ingredient in aluminum potlines.
Although there are alternatives in the battery market, the properties of Li-ion batteries make them by far the most attractive for secondary (rechargeable) applications. Their high energy density makes them by far the most attractive option despite a premium price. See a comprehensive list of their pros and cons here. Despite this the growth in battery use is frequently touted to be around 20-25% per annum mostly from the growth in laptops and smartphones. What makes lithium particularly exciting is its prospects to be adopted as the energy storage medium of choice for electric/hybrid vehicles. Researching into what the car manufacturing companies shows a clear bias towards Li-ion technology: General Motors have used it for their ‘Volt’ line, Nissan for their ‘Leaf’ vehicle. Now the Toyota Prius, which initially was using a Nickel-hydride battery has adopted the Li-ion battery.
Here is an interesting piece demonstrating the amount of Lithium actually required to produce a car battery. Combing through the detail I believe the author has been overly conservative and is overestimating how much lithium is required. For example they state that; ‘EV batteries will be 25% larger than the nominal or useable stated capacity to allow for capacity fade’. However the 16kWh assumption is based on the Chevrolet Volt which already includes this 25% over capacity in the 16kWh figure (the cell actually delivers 10.4kWh).
Supply:
There are two main methods to extract lithium from the Earth. The first method is hard rock mining. This method has declined significantly over the last 15 years as a cheaper alternative developed: Brine production. The world’s lithium production is focused in South America as it is one of the few places that has a high enough density of Lithium for economic extraction. With global production concentrated in a relatively small part of the globe.
There are reports that China may emerge as a significant producer of brine-sourced Lithium carbonate. There are brine production facilities in the Qinghai province and Tibet, however it is difficult to procure reliable up-to-date estimates on the figures behind these projects. Overall it seems they contribute around 25% of the global supply, however it is difficult to gauge whether this will be made available to the market with China’s propensity to hoard its resources.
Overall, the various sources I’ve used to investigate lithium supply conclude that feasibly extractable Lithium is not plentiful relative to the potentially increasing industrial appetite.
Forecast:
In summary it is safe to conclude that there will be no significant downward movements in the price of lithium. The price has been increasing consistently over the last few years and I believe it holds solid potential. The question remaining is whether the growth in supply can keep up with the demand to keep prices relatively stable (and probably nominally above inflation), or whether demand outstrips supply causing a large increase in the price over the medium term?
The prices are likely to take quickly if hybrid/electric cars become a hit as it appears they are becoming so (2million Prius sales worldwide over the last 3 years) although it may take a few years for the latest models to be price competitive with their petrol powered alternatives.
How and where to invest in Lithium:
The key players in the Lithium market are Chemetall (owned by Rockwood Holdings Inc.) , SQM in Chile and FMC Lithium in Argentina. The most obvious is to invest directly in the equity of these companies but both are diversified and would require a significant amount more research before I would be happy to recommend them.
A more direct way would be to invest in a Lithium ETF such as: Global X Lithium ETF (NYSE:LIT). Conveniently our friends over at Seeking Alpha have done the due diligence on this equity based ETF so for the details take a look here.
Another option would be to look at exploration companies. Possible include: Canada Lithium Corp. (TSE:CLQ), Galaxy Resources (ASX:GXY), Lithium Americas Corp. (TSE:LAC), Orocobre Limited (ASX:ORE) and Western Lithium USA (TSE:WLC). My pick of them would be Lithium Americas Corp. for its very economically feasible discoveries in Argentina. Close second Western Lithium USA after its recent news in on its (slightly less economical) prospects in Nevada given the US is likely to be the largest market and its development is less prone to political barriers.
One final note. Linking back to what I said at the beginning of the article, the thought has occurred to me that there are perhaps better ways to tap into the potentially explosive market of electric vehicles by investing in small companies that stand to profit. This has the advantages of less incidental diversification and potentially higher returns however, it also carries out a significantly more downside. Unfortunately a more detailed analysis will take considerable time so that will have to a post for the future!
