Usually, lithium is one of those commodities you don't hear much about. It doesn't trade on a futures exchange like other metals and the demand for it is relatively modest. It doesn't have the importance of industrial heavyweights like copper and aluminum, or the cachet of gold.
But that's changing quickly. The silver-white metal is suddenly the hottest commodity of the year, with prices trading near all-time highs on fears that supply won't be able to keep up with demand in the coming decade as the production of electric vehicles surges.
The sole lithium exchange-traded fund on the market, the $530 million Global X Lithium & Battery Tech ETF (LIT), is up 58.1% year-to-date and one of the fastest-growing ETFs, with inflows of $305 million so far this year.
YTD Return For LIT
It's easy to see why investors are suddenly so eager to jump on the lithium bandwagon. Demand is expected to skyrocket in the next several years as car manufacturers ramp up the production of electric vehicles. Lithium is a key component of lithium ion batteries, such as those used in electric cars like the Tesla Model S and the Tesla Model 3.
Data from Bloomberg New Energy Finance shows that annual global electric vehicle sales may increase from less than 1 million units this year to 24.4 million units in 2030.
Analysts at Morgan Stanley estimate electric vehicles will account for 9.4% of new vehicle sales in 2025 and 81% of new vehicle sales in 2050, up from 1.1% this year.
Push Toward EVs
The push toward electric cars comes even as oil prices trade at a fraction of their peak levels. Concerns about the climate are pushing individuals and governments to move toward electric vehicles over their fossil-fuel-burning counterparts despite the higher current price tag.
This year, Britain and France pledged to ban the sale of all gasoline and diesel-fueled vehicles by 2040, while Norway has an even more ambitious target of ending sales by 2025. Earlier this month, even China hinted it is considering a similar phasing-out of the internal combustion engine.
"We have reached an inflection point in electric vehicle adoption that can completely change the equation for lithium demand," said Jay Jacobs, director of research for Global X Management Company.
"Tesla’s Gigafactory in Nevada will reportedly produce more lithium-ion batteries annually than were produced in total in 2013, and will be the largest factory on the planet. The sense of scale occurring here is enormous, and is being driven by significant anticipated demand," he added.
A single electric vehicle can require as much as 10,000x as much lithium as the average smartphone, which had previously been a significant force for lithium demand, Jacobs noted: "There’s also another source of growing demand from renewable energy storage, which we are just scratching the surface of right now."
With lithium demand projected to grow so fast, the challenge for the industry is bringing enough supply online to meet it. Roskill, a metals consultant, estimates lithium carbonate equivalent supply must increase from 227,000 metric tons this year to 785,000 metric tons in 2025 to keep up with demand.
The firm expects supply to miss that target by 26,000 metric tons, leading to a deficit. It's projections like that that are driving lithium prices to new heights this year.
“The uncertainty on the supply side is driving prices up and making investors nervous,” Daniela Desormeaux, CEO of Santiago-based lithium consulting firm SignumBOX, told Bloomberg. “We need a new project entering the market every year to satisfy growing demand. If that doesn’t happen, the market will be tight.”
Australia is the largest lithium producer in the world, while Chile holds the largest reserves.
According to Bloomberg, there are 20 new lithium production sites planned, compared to the 16 currently operating, but the first new mine won't open until 2019.
Bull vs. Bear
While most analysts believe it will be a struggle for lithium supply to keep up with demand, not everyone is bullish. Mark Cutifani, CEO of miner Anglo American, sees supply overtaking demand.
“There are a lot of projects out there, and they’ll end up oversupplying the market,” he said.
Global X's Jacobs counters that it will take a while before the impact on prices is felt and that producers can thrive, regardless.
"While there are significant projects underway to ramp up production, we do not believe it will have a major impact on prices for a while,” he noted. “And once they do hit the market, perhaps it’s a downward pressure on spot lithium prices, but lithium producers can still potentially grow earnings through the increases in volume."
Sole ETF Option
For investors looking to buy into the lithium growth story, there's only one ETF option: LIT. The fund isn't what some people would call a "pure play" on lithium because it holds not just lithium producers, but lithium users such as Tesla.
Top holdings of the ETF include FMC Corp., Albemarle and Chile's Sociedad Quimica y Minera, which are three of the four largest producers in the world. Together, they make up 47% of the fund.
Samsung SDI, a battery manufacturer, accounts for about 7% of the fund, and Tesla, the carmaker, represents around 6% of the fund.
"There’s no such thing as a pure-play on lithium prices because there is no one standardized lithium contract," Global X's Jacobs said. "In many respects, the industry operates more like a chemicals industry than a mining industry."
"Rather than looking at lithium like a commodity, we view it as a technological theme playing on the rise of electric vehicles, personal electronics, and renewable energy storage,” he added. “As such, LIT is designed to capture the broader theme by including lithium miners and battery producers, both of which we believe will benefit from rising demand for batteries."
Contact Sumit Roy at email@example.com