Interesting Prospects for Lithium Batteries

| About: Global X (LIT)

In an article published almost three years ago, I argued that three factors may determine the adoption of lithium-ion (Li-ion) batteries, namely: oil prices, technological development, and resistance to change. This theory was further developed in a series of other contributions published on EVWorld.Com; and SeekingAlpha.Com.

Among the improvements introduced over the last two years into my original theory are discussions about: (i) oil prices, in terms of average annual prices and their volatility in a given period of time; (ii) technological development, in terms of both different kinds of Li-ion batteries and beyond them (e.g. Li-air batteries); (iii) extension of the concept of resistance to change to also include the idea of acceptance of change; (iv) interactions among these determinants of adoption of Li batteries and between adoption itself and its very determinants; and (iv) the Li supply chain, in terms of demand-supply flows of Li resources, Li batteries and electric vehicles (EVs).

The theory has been found to be extremely useful to explain the beginning of the electric car revolution. Indeed, current high oil prices, together with recent Li battery technological development and widespread acceptance of change by consumers, companies and governments, have been seen to favor adoption of such advanced energy storage systems all over the world.

In addition, there appears to be a feedback mechanism. In fact, as adoption of Li batteries proceeds: (a) the demand for oil could tend to diminish, eventually leading to a price decrease of oil which discourages adoption of Li batteries; (b) technological development will be encouraged, further promoting adoption, which could again tend to diminish the demand for oil, and eventually lead to a price decrease which discourages adoption of Li-ion batteries; and (c) acceptance of change will increase (and resistance to change will decrease), further encouraging adoption Li batteries as well as financial support for technological development and government policies aimed at, for instance, energy independence.

As for (a) and (b), one could think of the current electric vehicle euphoria as a rather temporary phenomenon. However, there are at least two factors conspiring against an immediate fall in oil prices and hence maintain the current momentum: First, the Middle East unrest, which has already led to a reduction of oil availability in the world. Second, the nuclear energy crisis in Japan that may eventually force Japanese authorities to install alternative fossil fuel based plants to generate electricity . And, of course, in the long run, peak oil and concerns about climate change and global warming will do their part too. In this context, there may be no need for a tax on gasoline, more funding for technological development or a ban on off-shore oil drilling, as some possible government policies I suggested in part 2 of my SA article, to respond to downward pressure over oil prices, which discourages adoption of Li batteries.

In terms of (c), car makers may, after some point, invest such a significant amount of money in the development of the new technology that it will be very difficult for them to return to a previous situation. Under these circumstances, government policies would in fact constitute an effect (rather than a cause) of adoption of Li-batteries.

Hence, even in the absence of additional government policies, chances are the world will embark much sooner than expected on a comprehensive movement towards car electrification. This appears to be in sharp contrast with David Kirsch's book, mentioned in a recent article, which places considerable emphasis on energy prices and government policies to explain the adoption of electric cars.

This brings me to a renewed discussion about the main determinants of adoption of Li batteries in relation to the Li supply chain, as defined in my second SA article I referred to above. Note in that contribution, three particular mechanisms emerge that can help explain why, under certain conditions, transition to electric propulsion in the global automobile industry will become both inevitable and irreversible.

To begin with, a self-regulating process will take place as the price of oil increases since this may lead to a greater demand for lithium resulting from an increase of Li batteries, which in turn is derived from an increase in the demand for EVs. However, as the supply of lithium goes up, the price of oil will go down because the supply of Li batteries will also increase, incentivizing the production of electric cars, while further discouraging the demand for oil.

Likewise, a resource constraint may be apparent if-- for instance-- a technological breakthrough in Li-air batteries occurs since this particular technology will require much more Li than Li-ion battery technology and the demand for Li-air batteries will also be increased, due to a greater demand for electric cars. In this context, if there is not enough Li to satisfy the additional demand, the prices of Li will increase, discouraging that specific type of technological development, because the demand for Li batteries will most likely decrease due to to a reduction in the demand for electric cars in light of the increase of the cost of the batteries. At this juncture, one may wonder what role (if any) will Bolivia´s Li identified and still untapped resources play. These are known as the largest on earth.

Lastly, a self-reinforcing mechanism will become evident as the acceptance of change (on the part of governments, companies or consumers) increases, because the demand for electric cars will also increase tending to diminish the price of electric cars, which in turn will further encourage the acceptance of change.

As shown in the following 8-M Global X Lithium ETF (NYSEARCA:LIT) chart, the stock market appears to have already picked these interesting prospects for lithium. Investors should be aware that this ETF “tracks lithium producers and battery makers” which permits them “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”. Perhaps we should now start thinking about the viability of an extension of this ETF to include electric car producers as well.

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Global X Lithium ETF

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.