Is It Time to Invest in Lithium?

Includes: FMC, ROC, SQM
by: Branson Hamilton
Lithium - an amazing material with broad applications. Securing a supply has been a priority of the U.S. for decades - until the end of the Cold War. Now the problem of strategic supply may be returning.
Lithium is the lightest metal, is highly reactive, and is also a source of nuclear fusion material. Its original industrial application as a high-temperature grease is still 10% of the use today. It was a critical material in creating the first atomic bombs in the 1940s, and the U.S. government maintained a stockpile for potential weapons use until the late 1990s. Its largest industrial use is as a flux in the production of ceramics, glass and aluminum.
Fifty years ago, Benjamin heard the word “Plastics” as the future in the movie “The Graduate”; today the word is “Batteries”. Who hasn’t heard of Lithium Ion batteries, the items that power laptops, iPods, cell phones, PDAs, and, well anything electronic that is portable? Lithium for batteries has exploded at a rate of 27% per year since 2002, according to the Tru Group, an engineering firm focused on the industry.
And, there’s more.
Lithium Ion batteries are powering the whole emerging product category of Electronic Vehicles [EVs], from GM’s new Volt (NYSE:GM) to electric-powered scooters and bicycles now seen in China. Vehicle batteries will jolt demand for Lithium to a whole new level, because after all, a car battery is enormous in size compared to that tiny thing in your cell phone.
The good news is that Lithium is one of the most prevalent elements on earth. The bad news is that there are only a few places where it is concentrated enough and unencumbered by other factors to enable economically-viable production.
Don’t worry, yet.
While there were shortages of the very high grade of Lithium Carbonate used for battery production back in the 2006-2008 period, Lithium supplies have been more than sufficient since the recent global recession dropped the bottom out of worldwide industrial production. From 2008 through 2010, prices declined by double-digits as the demand slacked off.
Recently there is evidence of tightening of supplies. For example, Talison Lithium (TSX:TLH.TO) stated in their Nov 15th earnings announcement that demand for its technical and chemical-grade concentrate is outstripping current production capacity.
Will there be a supply problem?
With the expected increase in battery demand and emerging use in light-weight aircraft parts, there is a strong debate among industry players regarding whether the current sources of supply will be able to deliver enough product when the economies return to stronger growth. And, while there are a dozen or more sites worldwide being evaluated for potential sourcing, it is not clear that any can be economically and environmentally exploited. No new resource production beyond what is in the pipeline is expected until at least 2020, according to some industry analysts. And, while production from three locations in China has been expected to grow to become the world’s largest source of Lithium, in August, China announced that it was reducing its 5-year production expansion goal by one half. Oops.
Lithium is mined from hard rock and extracted from brines of salt lakes. The brine method costs less to produce the high grade Lithium Carbonate from which batteries are made. The largest rock production is in Australia, while the largest brine production is in Chile and Bolivia. The current supply of Lithium Carbonate is somewhat concentrated, with four main players sharing the majority of the current market volume. A spokesperson at FMC’s Lithium Division identified them as follows: FMC Corporation (NYSE:FMC) 17%, Sociedad Quimica Y Minera de Chile (NYSE:SQM) at 29%, Chemetall, a Rockwell Holdings, Inc. company (NYSE:ROC) 27%, with China making up the remainder at 27%. Traditional rock producers, including Talison Lithium, are expanding Lithium Carbonate production to reach the battery market.
The jury is still out regarding the future Lithium production capacity relative to future demand for the metal. Just because companies claim vast resources does not mean that they can translate them into producing reserves – there are difficult technological issues involved. And, just because some folks would wish that everyone will own an electronic vehicle does not mean that they will.
What we do know is that interested parties have strong reasons to paint the picture to their advantage. Current producers of Lithium would prefer that we perceive their resources as able to satisfy demand, as this will deter development of competition and boost prices for the metal. Likewise, explorers and developers of new resources would wish us to believe that shortages are right around the corner to justify their programs. The engineers that produced the resource estimates for the existing producers don’t want their credibility to be questioned by others who offer alternative views. Those aligned with the oil industry would wish that there is a Lithium shortage. And, the proponents of battery-driven vehicles certainly don’t want their initiatives derailed by a lack of supply. Human nature being what it is, I don’t find it surprising that the positions presented by these different parties align with their expected interests.
There’s one more concern.
Earlier this year, the Chinese were accused of withholding rare earths from exportation. This event was the Pearl Harbor signaling the beginning of the scarce metal war. China intends to dominate alternative energy technologies – including batteries. Lithium is a state asset in Chile. Can the U.S. or any other industrial country afford not to exploit other resources to ensure supply?
So what is the future of Lithium?
During the short history of Lithium as an industrial metal, supplies have been both strategic and controlled for all but the last decade. Economies cannot do without it. Lithium resource development will continue to be a high priority as the Lithium supply chain is elevated again to a national security concern. New resources will be developed even if operational costs exceed those of the lowest-cost brine producers.
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Author's Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.