Lithium: World’s hottest commodity or investment hype?

Lithium – the lightest of all metals – is currently being regarded as one of the world’s “hottest commodities” primarily due to the expected surge in lithium-ion battery demand. Lithium’s growth case is directly conjoined with exponentially rising demand for electric vehicles and battery-based energy storage. Applying conservative assumptions to our models, our research suggests that lithium demand will be growing around 10% annually until at least 2020. While lithium is an abundant mineral, supply increase is limited in the short and mid-term due to the many years it takes to develop new lithium projects and bring them into operations.

Considering all development and expansion projects currently underway, it seems very unlikely that supply will be able to match demand until 2020 which will lead to increasing prices. Bryanston Resources explores the sustainability of the lithium story and the viability of investment options, given that lithium company valuations – along with lithium prices – have already soared in the past months.

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Climate change and price volatility in the energy markets have made governments, businesses and consumers acutely aware of energy and environmental issues in the 21st century. Businesses have slowly started to accept that 20th century fossil fuels do not make economic sense in the long run and as such, are now actively seeking renewable alternatives. Within the renewables pack, lithium, the lightest of all metals, seems to be playing a pivotal role and has been tipped as “one of the world’s hottest commodities” in several recent publications. 

But what does this mean for the lithium market from an investor’s perspective?

Any successful investment decision to enter this market requires a sound understanding of the full “lithium story”. A complete picture needs to be established which covers both the demand and supply dynamics as well as an assessment of the various investment options.

Demand

At approximately 35% of total use, lithium-ion batteries are not only the main application for lithium, but they are also the foundation of the lithium hype. The Li-ion batteries segment can itself be divided in 3 main application areas: electric vehicles, energy storage and portable devices. Owing to favorable legislation and incentives, electric vehicles volumes are expected to surge globally.

Innovative energy storage solutions using batteries are being developed and marketed by companies like Tesla Energy, targeting mass markets, businesses and utilities. Li-ion batteries with their high performance, declining production costs and superior features, are well placed to capture most of this anticipated demand. According to our research, substitution of Li-ion batteries by alternative technologies seems to be very unlikely over next 5-7 years. The mega-factory projects of Tesla, LG, Foxconn, etc. are indicative of the anticipated increase in lithium demand.

Assuming the growth case for electric vehicles is accurate, the most convincing argument as to why the impact on lithium demand will be huge is the following: a smartphone (of which approximately 2 billion exist today) contains between 2 and 5 grams of pure lithium, while an electric vehicle contains anywhere from 20,000 to 50,000 grams. If one now assumes that, say 25%, of the world’s 1.2 billion cars will be electric vehicles by 2030, this alone would lead to an exponential increase of the lithium demand over the next years. In our analyses we have considered many other lithium applications and have concluded that a rather conservative growth estimation for lithium demand is around 10% annually until 2020. In a scenario where the adoption of electric vehicles happens quicker than anticipated, the compound growth rate would be significantly higher.

Supply

Lithium is not a scarce metal, its reserves are abundant and spread over the world, especially in South America and Australia. Even sea water contains lithium. The difficulty facing miners is to find lithium rock or brines which contain amounts of lithium that can be extracted in economically viable terms.

Until now, lithium supply has been able to match increasing demand, with current supply dominated by four traditional suppliers. Sustained demand growth and limited supply have driven lithium prices from around $3,000 per ton in 2006 to well over $6,000 today. Sensing opportunity, new market entrants have started extensive exploration and development programs. We have identified 16 lithium projects globally which are anywhere between completion pre-feasibility studies and a few months off reaching their nameplate production capacity. In addition, numerous exploration projects are underway.

While lithium resources are abundant and market participants have realized the growth story, the biggest obstacle is that it takes at least 5-10 years from early exploration to reach marketable production. In fact, no project, according to our research, has ever been completed under 6 years.

Assuming the 16 global projects (including expansion of existing mines) which have already surpassed the earliest stage, all develop according to plan – which is rather unlikely given some overly optimistic plans – and they reach their nameplate production capacity, global lithium supply will increase by approximately 6-8% per annum until 2020. We conclude that it is highly unlikely that newer lithium sources could be developed between now and 2020.

Therefore, even with conservative growth in Li-ion battery demand, future lithium supply is very unlikely to meet growing demand until at least 2020. This widening demand / supply gap is likely to lead to steep price rises.

Investment

The number of publicly traded lithium companies is limited with an even smaller number of companies focusing almost exclusively on lithium. Most of these “pure play” companies have not yet fully developed their projects and hence come with significant operational and financial risks. Many also come with hefty valuations – the lithium hype has caused share prices to soar anywhere between 60-600% over the last 6 months (for lithium pure plays). There may be more to come: as a hedge against lithium price increases, manufacturers of Lithium-ion batteries and electric cars are likely to secure supplies by acquiring significant stakes in lithium assets.

From an investor’s perspective the key to success is picking the right lithium stocks. In our analyses we have identified a strong correlation between the development stage of assets (from pre-feasibility to close to nameplate production capacity) and the producer’s valuation per ton of production of lithium (nameplate capacity), as one would expect. However, upon close inspection, some stocks seem to have been at the center of the lithium hype without a sound justification while for others the best is yet to come.

If you want to find out more about Bryanston’s research in the lithium market and potential investment options, please reach out to Marie Proumen.