While virtually every commodity known to man has been plunging over the past 18 months there was one very notable exception.
It was lithium which went from a price of $6,000 per tonne where it had been for a number of years to nearly $14,000 per tonne in the last 12 months.
Source of image: Economist.com
If you haven't looked into lithium you should get yourself up to speed. The good times are likely just getting started for this commodity. The tricky part is going to be figuring out exactly how to profit from it.
What Is Lithium, Where Do We Find It?
Lithium is a very unique metal. Not only does it float on water but you could cut through it with an ordinary kitchen knife. It has both an unusually high boiling point and a very low melting point. You can find other elements of a similar weight, but lithium will at least twice as dense as the next best option.
There is a lot of lithium available, but the best of it is mainly located in South America.
Source of image: chem230.com
Bolivia has the most lithium, but Chile and Argentina are the biggest current producers.
The best lithium for production is found in brine, or salt lakes. Mining lithium from rocks can be done, and actually done faster than extracting it from brine. However the economics of evaporating it from brine are far superior.
Which Companies Produce Lithium
Lithium production is a true oligopoly. All of the best South American lithium reserves are already spoken for. Production of lithium today comes mainly from only four companies.
These four companies account for 86% of global lithium production:
- 31% from China's Tianqi Group
- 22% from Chemical & Mining Co. of Chile (NYSE:SQM)
- 20% from Albemarle Corporation (NYSE:ALB)
- 13% from FMC Corporation (NYSE:FMC)
Another 13% of production comes from a variety of Chinese producers. That means that there is only 1% of production coming from outside these five sources.
Why The Future Looks Bright For Lithium
We've been using lithium for a while. Since the 1940s it has been used to treat mood disorders. It is also used in the production of lubricants, heat resistant glass and ceramics.
Since the 1990s it has been a key component in cell phones, laptop computers, tablets and smartphones.
The game changer for lithium will be the electric car and renewable power for the grid.
Source of image: goldmansachs.com/our-thinking/pages/what...
In December Goldman Sachs released a "What-if" report. In the report Goldman referred to the fact that each Tesla Model S car battery required as much lithium as 10,000 cell phones.
It isn't going to take many Tesla Model S cars being built to make a big difference to lithium demand.
Goldman believes that only a 1% increase in the rate of penetration of the electric car would increase total global lithium demand by 50%. Goldman also believes that electric cars are going to increase in popularity as costs come down in the coming years.
According to Goldman, electric car sales will likely get to the point where they represent 22% of all vehicle sales in 2025. Goldman believes that would increase the amount of lithium required each year by 300%.
That is a very large increase in demand in less than 10 years.
There is another force that could push demand for lithium even higher. As solar and wind power continue to play a bigger role in power generation the need for energy storage also grows. The storage is unique to these renewable energy sources because the power they provide is intermittent. When it isn't sunny or windy we can't generate as much power.
Traditional power generation sources don't have this issue.
It is early days in the development of battery storage for the grid but lithium is currently part of the solution. We will have to see how that plays out in the coming years.
What Are Our Options For Investing In Lithium?
Concluding that demand for lithium is likely to grow isn't a stretch. Finding a way to profit from it is much more difficult.
First, investors can't invest directly in the commodity. There is no spot market and the price is currently set by negotiations directly between the major producers listed earlier and their customers.
Yes, we can invest in those producers but none of them are pure-plays on lithium.
Another option is a lithium focused ETF named Global X Lithium ETF (NYSEARCA:LIT). That ETF includes Chemical Mining Co of Chile, Albemarle and FMC Corporation as well as electric car manufacturers like Tesla (NASDAQ:TSLA)
We will be keeping our eyes open for other opportunities that emerge in the coming months and years.
Risks And Oil
The biggest risk for lithium demand is likely low oil prices. If gas prices stay where they are it is going to throw a big delay into the acceptance of electric cars.
We do not believe that is going to be an issue. While the current headlines are grim for oil the underlying fundamentals are improving. Supply destruction is taking place everywhere across the globe and OPEC isn't going to be able to repeat its 2015 production ramp up. The Oil Ministry in Iraq recently indicated that production from Iraq will decrease by 200,000 barrels per day in 2016 which is a big swing from the growth seen this year.
Another threat to lithium is the potential for a different and superior technology to emerge which thereby limits the lithium required in electric cars.
Disclosure: I/we 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.