Lithium: A Lucrative Commodity Play for 2011

Oct.17.10 | About: Chemical & (SQM)

By Nathan Slaughter

I have a little quiz for you.

I'll describe one of the most lucrative commodity plays I've ever seen, and you tell me which one I'm talking about. Ready?

  • This commodity is one of the most versatile on the planet. It can be used as a lubricant or a propellant -- it's even used as a coolant for nuclear reactors and in some medicines.
  • It's actually so widely used that I'd bet most people reading this are within arms reach of some of this metal.
  • The element is light enough to float on water. It's also soft enough to be cut with a regular kitchen knife.
  • Despite soaring demand, this commodity doesn't trade on a major exchange. That hasn't stopped its price from tripling between 2005 and 2009.

Given the returns, I'd venture many of you are thinking the answer is a precious metal -- gold or silver or platinum. But if you said lithium, go to the head of the class.

Lithium is a unique element that has been endowed with several curious properties. You don't need to be a chemist to appreciate the fact that this alkali metal has half the density of water, or that it has the highest specific heat of any solid. Industrial manufacturers are willing to pay hundreds of millions each year for these eccentricities.

You don't hear about lithium as much as you do other raw materials, mostly because it doesn't trade on any of the world's commodities exchanges. But the market is beginning to take notice. As I mentioned, lithium's price tripled between 2005 and 2009, and producers are spending big bucks on expansion projects to extract even more from the ground and the seas.

A trio of powerful catalysts
I'm always focused on catalysts -- the unique factors behind an idea or investment that can spur it to tremendous heights. And lithium has plenty of catalysts. Lithium is a versatile product with as many uses as duct tape. You can find it in fireworks, aircraft, glass cookware and even medicine cabinets (it's an effective treatment for bipolar disorder).

These applications drum up steady demand each year, but they're not what excite me. The real magic is that, pound for pound, this metal can store more electric energy than just about any other material. That has made lithium the battery maker's best friend.

When you think about the mountain of cell phones manufactured each year, it's easy to see what's driving demand. In China alone, nearly 1.9 billion lithium-ion batteries rolled off assembly lines in 2009, an +82% surge from the prior year's production. And output hit 306 million units in just the first two months of 2010.

Just within the Apple (NYSE: AAPL) family, these batteries are used to power iPads, iPods and iPhones. Oh, and the MacBook Pro line of laptops uses advanced lithium-polymer batteries that are ultra-slim and capable of running 10 hours on a single charge.

But electronic gadgets aren't the only place where lithium batteries are needed. Think about the trend toward hybrid/electric cars. Falling oil prices temporarily lulled this movement to sleep. But the tragic oil spill in the Gulf of Mexico has been a loud wake-up call, one that has precipitated another $6 billion in federal subsidies.

Even before the disaster, President Obama was an outspoken champion for the adoption of hybrid and plug-in vehicles. He outlined an ambitious goal of putting one million electric cars on the road by 2015, and 10 times that amount by 2018. The government is bankrolling the transition with some heavy incentive dollars.

The high cost of electric vehicles has been a potential roadblock. But anyone thinking of driving home a fuel-efficient new Chevy Volt or Nissan Leaf will have $7,500 in tax credits to influence their opinion. Meanwhile, Uncle Sam has also dished out $2.4 billion for battery development and $25 billion to help get automakers on board.

That cash will help grease the wheels and provide ample incentive to get electric vehicles from the R&D stage to the showroom floor. More important, it will facilitate the shift from oil to clean, dependable lithium batteries. (This is why I call lithium the "oil of the 21st century.")

That's just here in the United States. As market penetration rates rise, global production of electric/hybrid vehicles could surpass 200 million units per year by 2020. That's a lot of car batteries -- and another reason why the world has become increasingly hungry for lithium.

How do you invest in lithium? Many have done well with Sociedad Quimica y Minera (NYSE: SQM), the world's largest producer of the metal. This Chilean company has delivered a sizzling return in the past few years. The only problem with is that this stock is it's far from a pure play.

Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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