Lithium is increasingly hailed as a wonder metal. That alone may prompt commodity investors to run a mile. In the past decade alone, they have witnessed the rise and fall of rare earths and the short-lived nuclear-power renaissance that briefly made uranium an unlikely darling of the market.
They should cast their minds back a bit further, though, to the late 1990s and another metal: palladium.
Lithium is at the heart of the battery powering that portable device you can't seem to stop looking at. The bigger opportunity concerns batteries for electric and hybrid vehicles and power storage for homes, businesses and utilities, which require many pounds of the metal rather than fractions of an ounce. In a report published in December, Goldman Sachs posed this question:
What if I told you...Lithium is the new gasoline [?]
To which your response might be something along the lines of: wait, weren't you the same guys telling me uranium was going back up in 2008? Yet, while both lithium and uranium are touted by their fans as critical in the fight to cut carbon dioxide emissions, lithium has the distinct advantage of rarely being mentioned in the same sentence alongside words such as "tsunami" or "fallout."
The point is that if electric and hybrid vehicles with batteries keep taking market share away from internal combustion engines, the opportunity could be immense. In a recent report, Citigroup estimated that if sales of battery electric vehicles increased from an estimated 150,000 last year to 1 million by 2020 -- likely only about 1 percent of global vehicle sales overall -- lithium demand from that sector alone would rise by about 66,000 tonnes of lithium carbonate equivalent. Currently, demand for lithium across all its uses, ranging from iPhone batteries to industrial grease, is only about 160,000 tonnes.
So the big question is whether demand for electric vehicles can continue to grow at a rapid pace.
For many, the electric vehicle market's prospects begin and end with Tesla, not least because it has (a) the best model on the road and (b) almost frighteningly good social media skills. Tesla's volatile stock price and cash-burn concerns could lead you to conclude that electric vehicles aren't ready for prime time, especially with average gasoline prices having fallen back below $2 a gallon.
But demand for electric vehicles isn't just about pump prices. If it was, then why did electric vehicle sales across North America, Europe, China and Japan jump by 60 percent last year, according to data from Bloomberg New Energy Finance?
The answer is regulation.
In the U.S., such support ranges from federal fuel-efficiency targets to state and federal subsidies for zero-emissions vehicles that are prompting many other car makers to try to beat Tesla at its own game.
GM's Chevrolet Bolt is due to launch later this year and is expected to have a 200-mile range and cost $30,000 with subsidies. That will make it a direct competitor to Tesla's forthcoming Model 3, bringing electric vehicles closer to the mass market. Since 2010, the average price of lithium-ion battery packs for electric vehicles has fallen from around $1,000 per kilowatt-hour to less than $400, according to Bloomberg New Energy Finance. BNEF projects the price to drop below $200 in the early 2020s.
"We've entered a qualitatively different stage," says Steve Levine, author of "The Powerhouse," which chronicles the race to develop a better vehicle battery. He adds that traditional car companies have been spurred into action partly because they are "terrified that the [Tesla] Model 3 will take off like the iPhone."
Meanwhile, China's government is targeting 5 million electric vehicles on its roads by the end of 2020. In part, this is an attempt to give its domestic car manufacturers a leg up against long-established foreign rivals by putting their efforts into a field where everyone is still trying to figure out what comes next. But it also reflects the need to address China's choking smogs, about which Beijing is already taking action.
This is where it's useful to remember what happened with palladium. This cousin of platinum is used in millions upon millions of catalytic converters, which prevent the nastier emissions from exhaust making their way into the air we breathe.
Ford Motor began using palladium in catalytic converters in the late 1980s, just before emissions standards began tightening again in earnest in the early 1990s. This, along with a perceived shortage of supply from Russia, the world's second-largest producer, led to this:
That eight-fold spike in the late 1990s was eventually undone in part because it turned out that Russia's palladium stockpile, a state secret, was bigger than many had thought, and the market was flooded.
There is no such stockpile of lithium. The parallel here is that palladium shot up because it had a set of buyers -- vehicle manufacturers -- who had to buy it for regulatory reasons, regardless of what happened to the price. And this hardly mattered in comparison to the overall cost of a car anyway: Even at $1,000 an ounce, there is only about $100 to $250 worth of palladium in a typical car.
Similarly, a Nissan Leaf with a 24 kilowatt-hour battery contains around 45 pounds of lithium carbonate equivalent. While there isn't (yet) a liquid lithium market, Benchmark Mineral Intelligence in London compiles data on the metal and estimates the average price last year was $6,800 per tonne of lithium carbonate equivalent. On that basis, the Leaf's lithium cost is about $140, or all of 0.5 percent of the sticker price.
Supply, meanwhile, is lagging. This isn't a case of peak lithium -- the reserves are there -- but it isn't easy to get at. The cheapest form comes from brine deposits, such as the giant salt flats of Chile's Atacama desert, where evaporation is used to extract lithium. Conventional mining, in western Australia for example, is a more flexible source but also more expensive. Benchmark Mineral Intelligence estimates a production cost of $2,000 to $3,000 per tonne for brine deposits, but upwards of $4,000 for mining.
Benchmark Mineral Intelligence projects lithium carbonate prices to peak near-term in 2017 at almost $9,000 a tonne before falling back a bit as new supply enters the market. It adds, however, that this may not prove enough, as new sources of demand such as Tesla's gigafactory in Nevada open up.
Joe Lowry, a veteran of the industry, now runs an advisory service called Global Lithium. Having "kind of grown up with the overestimation of lithium," he says there is now a genuine shortage that will get worse this year due to delays in new supply. Lowry estimates a new brine deposit takes about four years to get going.
Gaining exposure to lithium isn't as easy as for other commodities. The big three producers are Chile's SQM and U.S. firms Albermarle and FMC. SQM, however, is embroiled in a legal dispute around the lease agreement that allows it to operate in the Atacama desert. Albemarle and FMC, meanwhile, are specialty chemicals companies, for which lithium is just one part of the business (an especially small one at FMC.)
Beyond these companies, there are purer plays on rising lithium use, such as China's Jiangxi Ganfeng Lithium or London-listed Rare Earth Minerals. The latter could probably use a name change, but has direct and indirect stakes in a Mexican project aiming to develop lithium clay deposits. The project has a preliminary agreement to supply Tesla, provided it delivers.
Tesla no doubt hopes to encourage more producers to enter the market in order to break the grip of the big three. Supply from the Mexican project is years away, so its appeal in the near term rests largely on Rare Earth Minerals and the project's operator, Bacanora Minerals, hitting feasibility and development milestones to reduce their risk premium.
Rising demand that is largely indifferent to price, combined with lagging supply, is what commodity bulls dream of. This underpinned the boom in palladium, as well as the recent bull markets in oil and copper. It looks like lithium's turn is coming.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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