I do not normally concern myself with money and investing, but since this one has a chemistry angle, I thought to offer it to you…
Lithium’s widespread use is nothing new, but the spotlight has been on the metal as demand for it appreciates. Although it’s not a precious metal, companies have been quick to mine it because it has become a critical element in a fast-growing market.
Lithium has experienced somewhat of a breakthrough in recent years as favored trends of increasing environmental standards and moving toward energy-efficient transportation have been set into motion.
Before investors rush to add lithium to their portfolios, here’s what you need to know about the commodity and its potential:
- Lithium demand is driven by electric vehicles.
- Ways to invest in lithium.
- Lack of transparency on lithium prices.
Lithium Demand – Electric Vehicles
Lithium is mined from the Earth’s crust like other metals. Its unique physical properties make it a very light metal, allowing the commodity to be used for many purposes. A large amount of lithium demand comes from its use in batteries for electric devices such as smartphones and laptops. But lithium has really risen in popularity due to increased demand in the electric auto industry.
SFA (Oxford), a firm that provides market intelligence of battery raw materials, claims that while lithium supply is plentiful in the near term, its demand is likely to grow mainly from electric vehicles and because its future market outlook is bright.
Lithium can be found worldwide. The largest reserves of lithium are in Chile, Australia and China, among other countries. There is a smaller amount of lithium production in the U.S., with the only functioning lithium mine being in Clayton Valley, Nevada. According to a report by McKinsey, “Lithium and Cobalt: A Tale of Two commodities,” the consulting firm doesn’t cite any supply constraints for the metal and notes that lithium is a very abundant mineral produced.
“Given the increase in lithium supply over the next several years, we see a balanced market for lithium by 2025 in our base and aggressive EV (electric vehicle) scenarios,” the report states.
In fact, during its battery day in September, Tesla (ticker: TSLA) announced plans to mine its lithium as a way to lower the cost of manufacturing the lithium-ion batteries used in its electric vehicles, thereby driving down the overall cost of the car.
The dominant market demand for lithium has also come from China. The country’s status is set to persist for a while since its government regulations and initiatives to significantly reduce pollution have encouraged the use of eco-friendly practices like driving electric or hybrid automobiles. The revolutionary push for electric vehicles will spur unprecedented demand for lithium.
SFA (Oxford) estimates that the growth of lithium demand, driven particularly by its role in electric vehicles, will result in new lithium mining and production to open in more countries. “Electric vehicle batteries are forecast to dominate end-use and so lithium is likely to play an increasing role in energy storage solutions,” the firm says.
Ways to Invest In Lithium
Long-term investors can think about investing in lithium stocks and exchange-traded funds. Stocks have more concentrated risk, while ETFs offer broad exposure and diversification. This is to say that if you’re not comfortable tracking individual lithium stocks, you may want to consider a lithium-based ETF. But for investors who are more familiar with the lithium market and have a good sense of strong lithium companies, holding lithium stocks could serve your portfolio well as an alternative investment.
Robert Uek, co-chief executive officer and portfolio manager at Essex Investment Management Co. in Boston points out three ways to invest in lithium: focused ETFs, established lithium producers that have large, low-cost operations, and startup companies that have identified a low-cost lithium resource.
Uek explains that startups in this space may be a bit risky but “have significant upside opportunities if they can execute on a plan.”
According to Uek, “A few of the more speculative startups might have an advantage in that they are focused on developing U.S. based resources and production facilities which meet the desire of both the U.S. government and U.S. auto industry as a means to limit China’s domination of the lithium processing industry.”
Here is a list of lithium assets interested investors should be aware of when exploring companies that produce, refine or mine the commodity:
Albemarle Corp. (ALB), the world’s leading lithium producer based in Charlotte, North Carolina is labeled as a “preferred global lithium partner” for its ability to scale, its geographical access to the global lithium market and its low-cost operating resources, according to a U.S. Securities and Exchange Commission filing.
Livent Corp. (LTHM), another one of the more established lithium companies, stated in its latest third-quarter 2020 earnings results that it plans to supply higher volumes of lithium to Tesla in 2020, extended its lithium hydroxide supply agreement with Tesla and further discussions are taking place for a long-term partnership with Tesla. LTHM stock soared following the announcement and is up around 50% year to date. The company expects to increase lithium volumes in the fourth quarter.
Sociedad Quimica y Minera de Chile (SQM), based in Chile, where some of the world’s largest lithium reserves can be found, is a major lithium producer. For more than two decades SQM has been extracting lithium and is improving the process. SQM has been performing well this year with the stock up more than 54%.
Tianqi Lithium is the largest and lowest-cost producer of lithium materials in China and has produced resources in Australia and Chile. China’s domestic resources are considered by other industry participants to be of a lower quality, far from downstream production sites, or both, says Michael Underhill, chief investment officer at Capital Innovations in Pewaukee, Wisconsin.
“As a result, the majority of Chinese refined lithium products such as lithium carbonate, hydroxide and downstream materials are produced using spodumene feedstock from Australia,” he says. Spodumene is a mineral, used as a source for lithium. Tianqi acquired 25% of SQM in a $4.1 billion investment in December 2018. This deal is an example of the push Chinese companies are taking to increase the production of electric cars in the country.
The Global X Lithium & Battery Tech ETF (LIT) offers a bundle of more than 40 holdings, with a market value of about $50 per share. A majority of assets are from China, and Albemarle is one of the fund’s top holdings along with other companies that deal with lithium mining and battery production. This ETF could be a suitable asset for investors to obtain broad exposure to the lithium market.[
Lack of Transparency on Lithium Prices
Investors can’t directly invest in lithium since it isn’t traded on a stock market exchange and there isn’t a futures market for investor access. Investors would need to turn to invest in publicly traded lithium companies to gain exposure to the commodity.
But because lithium is not traded publicly, and given that there is only a handful of lithium producers, it can be difficult to grasp its true market value. This could be challenging for investors to build an investing strategy with the commodity. Investors may want to diversify with the metal, but how would they hedge against any risks?
“Lithium is certainly part of today’s global economy,” says Rich Messina, managing director and head of retirement at JPMorgan Chase & Co. (JPM) in New York City.
While investing in lithium could be a strategy to diversify a portfolio, the metal is subject to supply volatility and a relatively small sphere of investment choices, he says.
The pricing roadblocks around lithium raise concerns about the transparency around the real market value of the commodity. It’s peculiar to observe that lithium prices have been falling. It could be that there is abundant supply, but with estimates for continued heightened demand from various sectors, it would be expected for prices to see an increase.
According to a September report by the United States Geological Survey, lithium production worldwide decreased by 19% in 2019 and the average U.S. lithium carbonate price during the same year was $13,000 per metric ton, a 24% decrease from 2018. The market cites geopolitical tensions and imbalance between supply and demand, but concrete data and research would be more reassuring to investors.
Traditionally, Uek says, the nature of the end markets, the types of customers and the structure of the contracts have not been very transparent for pricing.
“There are a number of independent research organizations and other entities that are trying to solve this issue, and we think that as the market grows there will be significant improvements on this front,” Uek explains.
Investing in lithium could present buying opportunities as long as the investment fits in your long-term investing strategy and doesn’t interfere with your risk tolerance.
Market participants are observing that lithium is a valuable commodity for its variety of uses and its anticipated demand from electric vehicles. But there are a few layers of research to understand its market value since you can’t trade the commodity directly.