- Tesla announced building 500,000 cars in 2018 and purchasing the complete current global lithium supply per year.
- Lithium is not scarce and could easily get oversupplied even with demand growing.
- Other technologies, like vanadium batteries, will always present a threat to lithium.
On May 5, Tesla’s (NASDAQ: TSLA) Chairman and CEO Elon Musk announced that TSLA intends to produce half a million cars in 2018. Apart from the craze currently surrounding TSLA, the trend towards electric vehicles is undeniable. An option that does not imply direct investments into electric cars manufacturing companies is an investment in lithium related investments as lithium is the most important material for battery production. This article is going to elaborate further on the investing possibilities, risks and rewards of the lithium option.
Lithium is a soft, silver-white metal with lots of industrial applications including heat-resistant glass and ceramics, lithium grease lubricants, flux additives for iron, steel and aluminum production and most importantly, lithium batteries and lithium-ion batteries. The demand for lithium batteries has fueled an immense increase in lithium prices in the last 12 months.
Figure 1: Lithium related products price movements in the last 360 days – China. Source: Asian Metal.
Surprisingly, increased lithium prices had an opposite effect on the Lithium ETF. As more and more projects are announced for lithium mining, existing producers face lots of competition and the above spike is considered temporary.
Figure 2: Lithium ETF. Source: Yahoo Finance.
The Global X Lithium ETF (NYSEArca: LIT) has performed terribly in the last 5 years. It fell from a value of above $46 in 2011 to the current $22.63. The ETF consists of the world’s biggest Lithium miners and lithium related companies like TSLA.
Figure 3: Lithium ETF top 10 holdings. Source: Global X.
The problem is that all of the top holdings that are lithium miners have seen their stock price plummet since 2011 as none of those companies is a pure lithium miner. FMC Corporation gets 70% of revenue from the agrochemical market and its primary market is Brazil, while SQM—which has one third of the world’s lithium reserves—receives only 11% of its revenue from Lithium. Therefore, even if the ETF is called the Global X Lithium it is not a pure lithium mining play. Unfortunately, such an investment does not exist, except for small lithium focused miners. Also, lithium is not traded on an exchange like it is the case with other commodities like gold or copper. Therefore, finding a specific lithium investment is a challenge in itself.
A lithium focused small cap investing strategy requires high specialization and lot of due diligence. Never forget the saying that a miner is usually a liar standing next to a hole in the ground.
Lithium Potential Supply
The main reason behind the weak lithium and lithium related stocks’ weak long term performance is that lithium is not a scarce metal. Even if Goldman Sachs is estimating lithium demand to triple by 2025 to 570,000 tons, apart from short term occurrences, there should not be a supply gap for lithium because it is a highly available metal and higher demand would only allow large mining projects to become feasible and lower the price. An example is Lithium X, a small lithium miner that has a concession in Clayton Valley, Nevada, with resources of 2.8 million tons, five times the 2025 estimated demand.
Figure 4: Clayton Valley Nevada. Source: Lithium X.
The map clearly shows how other miners are also researching the area and will probably add to the supply in the longer term.
Figure 5: SQM’s lithium production. Source: SQM.
Global miner BHP Billition’s CEO Andrew Mackenzie said that the lithium market is pretty small and it is unlikely that BHP will tap into it.
Risks Related to Lithium
Apart from the potential and quickly reachable oversupply, there are other risks related to lithium. As technology quickly evolves, it would not be surprising to see lithium replaced by other materials in batteries. Vanadium batteries are one example: the current advantages of vanadium are that it can be recharged more than 200,000 times while lithium batteries only about 7,000 times. On the other hand, vanadium batteries take much more space but there is always the risk that a new finding or technology might be around the corner and remove lithium from the throne.
Lithium fulfills only partly the criteria necessary for a low-risk / high-reward commodity investment. Demand is certain to increase but supply can also increase very quickly. There is no direct lithium investment except for small miners and those are always carrying high amounts of risk. The big global lithium producers have only part of their revenue deriving from lithium and have plenty of untapped mining potential in the case lithium demand increases.
Unrelated to the lithium issue but a good general example for investing in ETFs is the Lithium ETF mentioned above. As it consists of miners that receive only part of their revenue from lithium mining and companies that only use lithium, it shows how investors should do proper due diligence before investing in any ETF as the name might be misleading as it is the case for the Global X Lithium ETF.