Lithium
What is it?
Lithium is a chemical element with atomic number 3, a metal of a silver color. In nature it is always found in compounds (mixed with other elements), as well as in ocean water. The human body and biological systems in general also contain trace amounts of lithium, although its physiological role is not well understood.
Lithium is widely distributed on earth, as it represents 0.002% of the Earth’s crust. It is also present in all seawater on the planet. 75% of the world’s lithium reserves are found in the Lithium Triangle, at the frontier of Chile, Argentina, and Bolivia.
Did you know? Although it is a metal, lithium is soft enough to be cut with a knife.
Lithium is one of three materials that were created during the Big Bang, at the creation of the universe, with boron and beryllium. The main source of lithium in the universe today are star explosions. Pretty cool right?
About 77.000 tons of lithium are produced every year, while global reserves are estimated at 17 million tons, and resources at over 80m tons: the message is that our planet is not running out of lithium anytime soon.
What do we do with it?
By far the highest use of lithium is in batteries, representing 65% of annual production.
About 20% of lithium produced every year is used in ceramics and glass, mostly for heat resistant applications i.e. your ovenware.
The rest is used in lubricating greases, metallurgy and a variety of other, small, industrial applications such as aeronautics and optics.
What is the trade?
As you guessed it, this is a battery/electric vehicles (EVs)/electronic devices investment thesis. Proponents consider that the exponential increase in battery needs on the planet will drive an exponentially increasing demand for lithium. EVs are growing at 14% per year, and other applications for lithium such as wearable devices grow at 16% per year. It is estimated that lithium demand will grow 8x by 2030.
The challenge as discussed is that lithium is abundant, and widely spread, around the world. The main question therefore becomes how supply and demand will relate in the coming years i.e. it is clear that demand is increasing exponentially, but will supply keep up with it, and how will this affect the lithium price? For example Morgan Stanley expects Argentina, Australia, and Chile to add 500.000 tonnes of lithium to the market every year by 2025, vastly outpacing forecasted growth — this could lead the price of lithium to fall almost by half.
How to trade it?
First of all, there is a recognized index (benchmark) for the lithium sector: the Solactive Global Lithium Index, which tracks the performance of lithium mining, exploration and lithium-ion battery production.
Common public lithium companies include Albermarle (NYSE:ALB), the world’s largest lithium producer, and Sociedad Quimica y Minera (NYSE:SQM), Livent (NYSE: LTHM). All these are companies trading in dollars, on a main US stock exchange, and with operations in stable countries. As such they are each a reasonable lithium play for investors. Unlike a lot of natural resources, for lithium we have multiple pure plays trading in USD, on a major US stock exchange, and with operations in relatively stable countries.
However, for most investors I would still prefer, as usual, a diversified ETF, namely the Global X Lithium ETF (NYSE: LIT). This is an ETF trading since 2010, which is exposed to the entire lithium cycle from mining to battery production, and which holds the above listed lithium mining companies among its top holdings. It aims to track the performance of the Solactive Global Lithium Index.
Other companies well positioned as market leaders for lithium-ion batteries are Tesla (NASDAQ:TSLA), General Motors (NYSE:GM), Panasonic (OTCMKTS
:PCRFY) and Toshiba (OTCMKTS:TOSYY).
As always, let’s have a look:
We see a relatively stable, or slightly falling, prices for the period 2010–2015, followed by a spike around 2017–2018, with prices then falling, sometimes below their 2010 prices. And we then see a huge spike with a tripling in prices starting in 2020. Unless someone assumes a huge supply shock in the coming years, it is difficult to see these prices holding up: demand for lithium will certainly increase vastly, but lithium is abundant and cheap to mine, meaning that competition among numerous producers will be fierce and drive prices down. Perhaps LIT, which as an ETF owns mining producers but also battery producers, might be a more viable investment, giving investors exposure not only to lithium producers, but also to leading battery companies.
HWS AG’s German Lithium Participation investment program offers the first direct investment opportunity for lithium. The lithium carbonate is stored in barrels in a German warehouse.
