Lithium prices and shares

 By Andrew Burger

Market prices for lithium carbonate and lithium hydroxide have been on a tear in recent years…

Fueled by an anticipated boom in demand for lithium-ion batteries (LiBs) used in electric vehicles (EVs) and in stationary energy storage applications, i.e. in homes, businesses and on utility grids, as well as ongoing growth in demand for battery-powered consumer electronics devices and equipment. Lithium is not traded widely, or on any centralized exchange or market, however. Investors have been buying up shares of lithium miners and upstream supply chain producers as proxies.
September was the best month since April 2016 for lithium producers and investors riding the speculative boom in the shares of companies engaged in lithium mining and production, investment adviser Matt Bohlsen highlighted in his September 2017 recap of lithium spot and contract prices. “Back then if you were an early follower of mine you could have bought Chile-based SQM for US$19.99, FMC (Freeport McMoran) for US$38.16, and Albemarle for US$64.50. Now that was great buying! But don’t worry if you have not bought yet, we are still in the first stage of the EV boom with EV market share globally only at ~1%,” Bohlsen said.
Bohlsen sees plenty more in the way of gains ahead, and recent developments lend substance to the bullish outlook. The Chinese government’s new mandate that EVs make up at least 10 percent of auto manufacturers’ production in 2019 and 12 percent in 2020, with higher annual percentage targets for future years expected, triggered another spike in lithium prices. The Chinese government was preceded by similar announcements on the part of France, India and Norway, all of which have announced plans to phase out production of fossil fuel vehicles.

Extraordinary gains

Clearly, Bohlsen and others investing in the shares of lithium miners, supply chain participants and the like have reaped some extraordinary gains for their prescience and risk taking. But as in any speculative frenzy it’s practically impossible to separate high spirits and emotions from calm, cool, reasoned consideration of facts and data, and what we can, and can’t, conclude from them.
Is their bullish fervor regarding the prospect for the bullish trend in lithium share prices justified? Or will lithium-related investments turn out to be another example of a speculative boom and bust, as was the case with shares of internet stocks, real estate investment in the first decade of the new millennium?
“When will the lithium bubble burst?,” reads the headline of a June 30, 2016 article written by Daniel Shane for Barron’s. The market price for lithium had risen 50 percent over the previous 12 months, while the shares of some leading lithium miners listed on the Australia Stock Exchange (ASX) were had risen as much as 1,500 percent over the period. “But the rally could be a car-crash waiting to happen,” Shane wrote.
Not anytime soon, as it turned out. Lithium prices had risen to an all-time high of $149.88 per metric ton in November 2017, up from a record low of $62.79 in February 2016, according to Trading Economics.

Location of the battery pack shown in a cutaway of the 2013 Nissan Leaf (Norsk Elbilforening, Flickr)

Zooming in on lithium

Minerals and mining industry veteran Joe Lowry has been zooming in on lithium since the early 1990s, when he was responsible for global upstream lithium products at Freeport McMoran (FMC), one of the world’s largest diversified mining concerns and a leading producer of lithium ore.
Sony was commercializing the lithium-ion battery that are now being used to manufacture EVs and the stationary LiBs now being installed in homes, commercial and industrial facilities and on utility grids. FMC was producing lithium ore from hard rock mining at the time. Most of the lithium produced today comes about as a result of evaporating brine rich in the metal.
Lowry moved to Asia to focus exclusively on the lithium market with the launch of Global Lithium LLC upon making his exit from FMC in 2012. From his home base in Japan, he made connections with the founders of Ganfeng and Tianqi, now two of the world’s largest lithium producers, as well as executives at Chinese, Korean and Taiwanese companies that now manufacture lithium-ion cathodes and batteries. “A false start in the EV world about a decade ago and a few high profile lithium project failures led to a long period of limited investment that ultimately has resulted in a tight market that could last a decade,” Lowry said in a recent interview.
“The industry was not adequately prepared for the growth profile of the electrification of transportation that we are beginning to see unfold. In fact, it is my opinion that delayed investment makes it virtually impossible for much greater than 5 percent EV penetration by 2025. I’m talking about pure EVs, not hybrids. The industry needs over $6 billion of resource investment before 2021 (~400,000 metric tons of new LCE capacity in chemical form) just to cover the base market, consumer battery market, ESS and 5% EV penetration in 2025.”

Market expectations

Analysts at UBS Securities concur. They expect lithium prices will remain well above historical levels through 2024 as EV batteries reach cost parity with internal combustion engines (ICE) around the middle of 2018. That will spark a huge surge in lithium demand, one lithium miners and supply chain partners will find very difficult to meet, Keith Schaefer reported in a June 17, 2017 for the Oil & Gas Investments Bulletin.
UBS analysts point out that lithium production, whether from brine or hard rock mining, will need to increase 2,898 percent in a scenario in which all the cars sold worldwide are EVs. A lot of uncertainty surrounds the question of whether or not lithium miners, refiners and distributors will be capable of meeting this level of demand. Their record to date is spotty when it comes consistently producing lithium and at full, nameplate capacity, UBS notes.
Laurentian Capital takes a contrarian view, offering up three good reasons why soaring lithium and company shares profiting from the investment boom are set up for “The Lithium Big Short” along with one recommendation:

  • There are plenty of lithium reserves to satisfy the demand for many years.
  • The current production capacity ramp-up scramble is driven by fear of missing the price spike and greed for sharing a bigger slice of the incredible growth of demand.
  • There may be a huge excess of production capacity in 2018-2019, which may cause a recession in the lithium mining space following the pricking of the lithium bubble.
  • Prudent investors should, on the one hand, apply caution as to the junior lithium explorers and, on the other hand, be prepared to take advantage of opportunities offered by such a recession.

Investors riding the growing wave of investment in lithium production are in risky, highly speculative waters. There’s no shortage of cautionary tales whereby a huge surge of corporate investment in ramping up production in capital-intensive industries leads to spectacular business and market failures, as well as equally spectacular returns. One need only look to the internet boom of the late 1990s, or the more recent speculative surge in the share prices of solar energy companies for examples.

READ MORE: Powering the energy storage revolution by Mike Scott

about the author
Andrew Burger
Andrew Burger has been reporting on energy, technology, political economy, climate and the environment for a variety of online media properties for over five years.