Lithium ETF Plays Growth of EVs and Gadgets

Oct.27.10 | About: Global X (LIT)

You may be reading this article thanks to the lithium battery in your notebook computer, smartphone, or other mobile device. Demand for lithium is forecasted to double in this decade thanks to a wide range of applications for this metal that is half the weight of water: materials, glass, pharmaceuticals, mobile electronics, power tools, hybrid cars, and electric cars.

Currently, electric cars cost more to purchase than many gasoline-powered cars, but less to fuel. Electric charging is equivalent to fueling with gasoline at 75 cents per gallon in many situations. Nighttime charge rates are even lower.

In 2012, Ford (NYSE:F) will deliver about 100,000 lithium battery packs in its electric vehicles, new plug-in hybrid, and in all hybrids. Nissan (OTCPK:NSANY) will bring on-line a new battery plant in Tennessee that can make 200,000 lithium battery packs annually for its LEAF and hybrids. These volumes, improved battery chemistry, and streamlined supply chains will drive down the cost of lithium batteries. Automotive lithium battery packs currently cost about $700 per kilowatt-hour. By the end of the decade, automakers are optimistic that they will lower the cost to $250/kWh, at which point electric cars will be less expensive to buy than most gasoline cars.

What do the financial markets make of lithium? To find out, I interviewed Bruno del Ama, CEO of Global X Funds. His exchange-traded fund, Global X Lithium ETF (NYSE: LIT), was launched on July 23, 2010, at 16. It has already soared to 20. For some investors, lithium is the new gold. 10 of the fund holdings are in lithium mining and processing companies; 10 in lithium battery makers.

The fund is dominated with large mining firms such as Sociedad Quimica y Minera de Chile (NYSE:SQM), FMC Corporation (NYSE:FMC), and Rockwood Holdings (NYSE:ROC). The fund is not a dream for environmentally and socially conscience investors. These companies mine a range of metals, using energy intensive processes, chemicals, and put miners in harm’s way.

The fund’s largest lithium battery company holdings include Saft (OTC:SGPEF), Ener1 (NASDAQ:HEV), Advanced Battery Technologies (OTCPK:ABAT), GS Yuasa (GYUAF.PK), and A123 (AONE). Saft in a joint venture (JV) with Johnson Controls (NYSE:JCI) supplies Ford for the Transit Connect Electric and Mercedes hybrids. GS Yuasa supplies the current Japanese EV leader, Mitsubishi (OTCPK:MMTOF) ; GS Yuasa is well positioned to be Honda’s (NYSE:HMC) supplier for new electric and plug-in hybrids. Ener1 is betting on the Think. A123 is supplying Fisker and non-automotive applications.

The fund does not include the battery companies most successful in lithium: NEC, Panasonic (PC), Samsung (OTC:SSNLF), and LG Chem. These diversified giants are excluded because their lithium battery business is less than the 15 percent minimum to be included in LIT. NEC is in the AESC joint venture with Nissan. Panasonic supplies Toyota (NYSE:TM) and Tesla (NASDAQ:TSLA). Samsung is in a JV with Bosch to supply makers such as BMW. LG Chem’s Compact Power is supplying lithium batteries for the Chevrolet Volt and the Ford Electric.

Scientific American reports a 500-year supply of lithium, compared with only decades of available copper. Demand for lithium will increase as we expand from devices that only need one battery cell, to notebook PCs needing the equivalent of 8, to hybrid cars that use the equivalent of 125, to the Nissan LEAF, which uses the equivalent of 3,000. (Reuters Lithium Facts)

It would take 60 million cars to use the current annual production of lithium. Although there is plenty of lithium, prices will increase to keep up with the growing demand. Since a typical electric car battery pack only uses 4 pounds of lithium, the price will have little impact on the total battery cost.

There is no guarantee that today’s lithium ion batteries will be the leaders in future decades. Labs to start-ups are working on lithium air, zinc air, fuel cells, ultracapacitors, and hybrid energy storage. It is challenging to overcome lithium ion’s cost and scale advantages. More energy can be stored in an ounce of this metal than any practical metal alternative.

By 2020, the California Energy Commission forecasts 1.5 million plug-in cars on California roads. Clean Fleet Report forecasts 10 million for the USA. Cars, mobile electronics, and many applications will fuel the demand for the lightest of metals and create growth opportunities for the leading battery suppliers.