Long viewed as one of the primary avenues for playing the electric vehicle boom, the Global X Lithium & Battery Tech ETF (NYSEARCA:LIT), which tracks the full lithium cycle from mining and refining through battery production, is down more than 20% this year.
Tighter supply in the global lithium market could impact LIT. LIT is more than eight years old and targets the Solactive Global Lithium Index.
"Fitch believes there are challenges to producing high-quality supply that could cause additions to fall short of expectations, even if demand for electric vehicles (EV) and other electronics requiring rechargeable batteries temporarily slows," said Fitch Ratings in a note out Thursday.
Electric vehicles are in the early innings of development, and there are signs that there is a lot of pent up demand among consumers who want to embrace the technology. In 2017, electric vehicle sales represented 1.7% of all vehicle sales globally, exceeding 1 million for the first time and rising 51% year-over-year. The rate could continue to accelerate as a result of EVs becoming more economical than gas-powered cars and as a result of a pro-climate regulatory change pushing to ban gas-powered cars.
Crimped Lithium Mining Supply
LIT holds 33 stocks, and several of those companies are directly engaged in lithium mining. Over 58% of LIT's sector exposure is allocated to the material sector.
"CRU projects global supply of lithium carbonate equivalent will hit 557 kilotonnes (kt) by 2023, rising at an 18% CAGR from 2015 to 2023. This projected capacity growth is highlighted by expansion projects from all of the leading global producers," according to Fitch.
While producers are looking to increase lithium output to meet rising demand, that does not mean all the projects will come online in a timely fashion. Nor does it mean producers are assured of tapping high-grade lithium.
"Lithium operations, particularly brine, can be difficult to bring online and require expertise and a significant learning curve to operate effectively," said Fitch. "Delays in project timing are not uncommon, even among top producers, and plants can take years to fully ramp up once construction is completed."
The potential for supply shortages comes against a backdrop of robust demand expectations, and those expectations are in place for a multi-year period.
"Leading industry analysts project lithium demand to remain robust through the next several years as a result of the continued adoption of EV, with CRU projecting lithium demand to grow at a 12% CAGR through 2023 to 484kt," according to Fitch.