Increasingly Important Lithium Production May Bring Future Profits To These Companies

Includes: FMC, GM, ROC, SQM, TM, TSLA
by: David White

Lithium is an element that has many modern day industrial uses. The most prominent and fastest growing of these is its use in electric cars or combo cars (both electric and gasoline powered) for batteries. It is also used in many other batteries used to power appliances such as cell phones, cameras, portable computers, etc. Alcoa (NYSE:AA) uses it to make their latest light weight lithium-aluminum alloy for the aerospace industry. Other uses include: air conditioning, biotechnology, carbon dioxide absorption, use as an additive to construction materials such as cements to make them stronger and faster setting, ceramics, glass, enamel, humidity control, industrial catalysts, lubricating greases, aluminum manufacture other than the alloy mentioned above, organic synthesis, pharmaceuticals, thermal heat storage, the rubber industry, welding and brazing, zerolites, and many more. The following pie chart from the USGS gives an approximate breakout of the major uses in 2011.

As you can see batteries are already one of the biggest uses. However, batteries are expected to become an increasingly big piece of the pie. Some estimate that Lithium use for batteries will grow at a 12%+ per year rate for the next ten years at least, while the other uses will grow at only about a 3% rate. The following chart depicts the signumBOX lithium consumption forecast through 2025.

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The 2012 lithium consumption is about 130,000 tonnes, According to this forecast that is scheduled to grow to more than 400,000 tonnes by 2025 (or more than triple). However, such estimates are possibly highly inaccurate. The chart below from Roskill depicts demand growth for just the electric vehicle market through 2020.

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There are two different scenarios -- 5% EV vehicle penetration of the auto market and 10% EV vehicle penetration. In the 5% penetration case about 2.7 million EV vehicles will be sold. In the 10% penetration case, about 4.9 million EV vehicles will be sold. A Stanford study estimates the Nissan Leaf's battery (an approximate 100 mile range) uses about the average amount of lithium at about 2.4 kg of lithium. The Tesla (NASDAQ:TSLA) batteries use much more. Approximately 1 kg of lithium is used for each 10 kWh. The Tesla Model S (a 200 mile plus range) comes with a choice of a 60 kWh and an 80 kWh battery. Therefore the actual amount used will depend greatly on which manufacturer is selling the most EV cars; or if others soon develop longer range EV cars (as many expect), it could depend on what battery selection most customers are making. As you can guess, even the diverse estimates above are highly variable. By 2020 the Nissan Leaf's 100 mile range is likely to have been extended to 200+ miles per charge. General Motors (NYSE:GM) should have a long range (200+ miles on a single charge) mass market ($30,000) EV car out far before 2020. Toyota Motors (NYSE:TM) is developing a 600+ mile range EV. That may be ready by 2020. I am sure other automakers are making similar plans. This likely means an average of 6-10 kg of lithium will be used to make each EV battery. This will mean the 2.7 million cars (5% EV penetration) sold in 2020 will need 16.2 - 27 million kg of lithium. If the number sold is closer to 4.9 million, those cars will need 29.4 - 49 million kg of lithium.

One kilogram is equal to one thousandth of a metric ton (tonne). On the high end, the EV market may need 49,000 tonnes of lithium for batteries by 2020; and this is without even considering such things as Toyota Motors 600+ mile EV. The battery of that car seems sure to use even more lithium than the Tesla cars. On the very low end, the EV market will need only 6,480 tonnes, although this is extremely unlikely. If you believe TSLA estimates at all, the actual number is much more likely to be near the higher estimate; or it may even be over the higher estimate.

A longer term forecast from the Lithium Exploration Group shows the use of lithium skyrocketing after 2020 (see chart below).

This forecast calls for 500,000 tonnes of demand just for big batteries and another 200,000 tonnes of demand for smaller batteries; and that is not even considering lithium demand for anything else. All this means that lithium miners/producers are likely to be profitable over that time.

The biggest world lithium reserves currently known of are:

  1. Chile -- 7,500,000 tonnes
  2. Bolivia -- 5,400,000 tonnes
  3. China -- 3,500,000 tonnes
  4. Australia -- 970,000 tonnes
  5. Argentina -- 850,000 tonnes
  6. Canada -- 180,000 tonnes
  7. US -- 118,000 tonnes
  8. Brazil -- 64,000 tonnes
  9. Zimbabwe -- 23,000 tonnes
  10. Portugal -- 10,000 tonnes

I am sure more reserves will be discovered over time. For instance, it is very hard to believe the Brazilian figure. Brazil is a very natural resource rich country; and I have no doubt that huge lithium reserves will eventually be discovered there. Still according to the Lithium Exploration Group's world demand forecast, battery (both big and small) demand will reach 700,000 tonnes per year by 2050. The total world reserves are currently only about 16.9 million tonnes. If you figure non-battery uses will have grown to about 300,000 tonnes by then (to get a round figure), then it would take only about 17 years at that pace to completely use up the world's lithium reserves; and that is without considering that perhaps most of those reserves would have already been used up by 2050.

Somewhere along the way lithium will become more expensive; and the companies that control it will be the ones to profit. The chart below shows the share of world production of a few of the major companies. The chart is from in 2009.

The major non-Chinese producers listed for 2009 were: FMC Corp. (NYSE:FMC) with 17% of the market, Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) with 29% of the market, and Chemetall, a subsidiary of Rockwell Holdings Inc. (NYSE:ROC) with 28% of the market. I am sure the market has changed since 2009; but it is likely these big companies are still the leaders. Each may receive a boost in future years from its lithium production operations. Each is worth taking a better look at if you are an investor. Each is a large diverse company; but even such companies will benefit from a quickly growing, profitable business, which lithium production promises to be for many years to come.

Two year charts of each of the three are below:

The two year chart of FMC is below.

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This is a particularly strong chart; and FMC may be worth looking at for many reasons.

The two year chart of ROC is below.

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This is a strong chart that has been consolidating for all of 2013. ROC could be storing up energy for a significant move upward in the near future.

The two year chart of SQM is below.

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The SQM chart shows a horrible downtrend. However, SQM is a big fertilizer producer along with its lithium production; and fertilizer companies have been having a terrible year. Virtually all of them are down substantially. When you consider SQM as an investment, you will want to take a strong look at the fertilizer business.

This article is only meant to be a starting point; and I will try to follow it up soon with an article about new lithium producing companies. These should be much more heavily dependent on their lithium production for their revenues and earnings. Therefore their future performance will be more directly dependent on lithium production. However, it is always a good idea to give the industry leaders strong consideration; and I have attempted to introduce them here.

NOTE: Some of the fundamental fiscal information above is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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