A Response to Lifton's Concerns About New Global X Lithium ETF

Includes: GEX, LIT, NSANY
by: Juan Carlos Zuleta

As reported by The Wall Street Journal a few days ago, MC Capital Advisors and Global X Management Co. have announced the launch of Global X Lithium ETF “that tracks lithium producers and battery makers”. The ETF builds on an index comprising 20 companies. What is interesting about this ETF is that investors will now find a way to participate at the same time in production of lithium resources and one of its most important sources of demand (i.e. batteries) while diversifying their risk and uncertainty.

This idea could not be more timely given the hype generated by the up-coming introduction of the first mass-produced lithium-ion battery operated electric cars by Nissan (OTCPK:NSANY) and General Motors into the market later this year. Even though in 2009 lithium production declined by 28% with respect to the previous year, essentially due to the prevailing economic recession, most battery makers have continued to invest heavily mostly in research and development aimed at obtaining the most suitable lithium-ion battery for the emerging electric car market. This has been matched by similar behavior on the part of lithium producers; existing mining operators have announced new investments to cope with demand in the coming years and there are now almost 70 pipeline projects at different stages of exploration and evaluation getting ready to exploit lithium in different parts of the world. Behind this are the fears that there is not enough lithium on earth to cover the demand for lithium-ion batteries and electric cars.

This has not prevented some critics to express concerns about lithium supply. In fact, in a recent article, Jack Lifton has argued that lithium is part of a group of rare metals as defined in terms of an annual production of less than 25,000 MT. Lifton observes that since world lithium production in 2008 was about 25,000, lithium was on the threshold at the time, but beginning last year it is definitely below it, which means it is now part of the so-called rare metals group. But his definition of rare metals is, to say the least, completely flawed and misleading. What he is saying is that lithium is rare because its annual production is less than 25,000 MT. That doesn´t make any sense. Common sense indicates that something is rare because it is scarce. And lithium is not scarce. In effect, according to the US Geological Survey, as of January 2010, there are 25,5 million MT of identified lithium resources in the world, enough to cover all the requirements from the battery and other industries in this decade, the next, and the years to come thereafter. Besides, following his reasoning, lithium will no longer be a rare metal if production surpassses Lifton´s 25,000 MT threshold, a clear possibility beginning 2011.

As is well known, Jack Lifton has long been sceptical about lithium-ion batteries altogether. In 2009 I published a rebuttal of one of his articles. (See my article:”Response to Jack Lifton´s ´Lithium Batteries: Nothing but Illusion´”). In his new article, Lifton is correct though when he mentions the role of technological advances and breakthroughs in adoption of lithium-ion batteries. But his idea of an indexed ETF that includes investments in technological breakthroughs that can drive future high demand requires futher scrutiny. Also, be aware that he misses the other two determinants of lithium-ion battery demand: the price of oil and its volatility over a given period of time and resistance to/acceptance of technological change, I have advanced in a number of papers beginning June 2008 (See my article:”Revisiting Peak Lithium or Lithium in Abundance”) and particularly in my presentation at the second Lithium Supply and Markets conference held in Las Vegas in January 2010 (See my articles: ”The Future of the Lithium Market Part I”; and ”The Future of the Lithium Market Part II”).

Lastly, in his article Lifton gives the impression that he would love to be on the board of directors of the newly created ETF to contribute with all his ideas, which seems to me at best a little odd.

Disclosure: Author is a lithium economics analyst based in La Paz, Bolivia. In January 2010 he participated as an invited speaker at the Lithium Supply & Markets Conference held in Las Vegas, USA. He holds no positions in any stocks.