Peak Lithium: Death Blow For Electric Cars?

Includes: ROC, SQM, TSLA
by: Shaun Connell

Economists and investors love to argue over the peak oil theory, and what the impact will be for a shrinking high EROEI oil supply means for the global economy. Some think we'll switch to natural gas and electric vehicles, some put their faith in biofuels, and some claim that we still have so much oil through shale oil reserves that we will have entire new technologies ready before it's a problem.

I'm solidly in the electric and natural gas vehicles camp. There's a substantial amount of natural gas for trucks and tractors, and the electric vehicle infrastructure just needs to be produced for a while in order for people to switch over. Both are environmentally friendly, at least to the air, and it's just a logical switch.

The problem, though, is when many claim that we won't be able to use electric batteries for long because of "peak lithium". Some even claim that since lithium is in other countries, it's somehow not "secure", so we shouldn't make the switch.

How Much Lithium Exists?

The claims that there is only a finite amount of lithium are certainly true. But the claims that we can't somehow have enough to build an infrastructure of electric vehicles is absurd, especially if we assume that electric vehicles won't be the only kind of vehicles -- there will be natural gas trucks, electric cars, and possibly other fuels going forward as well. And heck, yes, some vehicles will keep running on oil.

All considered, even if we began to mass produce electric vehicles, "running out" of lithium is a silly and paranoid fear. From green-tech energy expert Nick Butcher:

When you look at the details, it turns out that the only thing worth losing any sleep over is lithium. Here I was slightly concerned, as it's one material that's not already used in huge quantities. A USGS estimate puts lithium reserves at 10 million tons. That'd be a bit close for comfort! That was back in the 1970s, though -- a more recent study by Evans put the figure at 30 million tons. That's a bit better, but still tight (as you see above, 1.5 billion cars). But now, SQM estimates reserves may exceed 60 million tons! The evolution is outlined in this report, and the reason is clear. With USGS reserves already at 10 million tons, and annual demand currently only around 0.034 million tons, we have enough known reserves for 300 years at current extraction rates.

It's not that there's a shortage, it's that there's so much that until the last few years, no one has bothered to look for more. In fact, lithium exists at similar concentration in the earth's crust to lead and nickel. The question is only one of economic extraction and technology, and with current lithium prices only accounting for around 2 percent of the cost of a LiFePO4 battery in terms of $/kWh, that's not something we need to worry about anytime soon.

This isn't just one source or something. Multiple studies have shown we have a century of lithium already, if we start mass producing EVs. Accounting for breakthroughs and new technology and even more alternatives, it is like it's 1912 for oil.

Supply and Reserves Change

The amount of lithium deposits that exist in a position we can economically mine them changes, as well. As demand goes up, so will the amount that is economically recoverable.

Also, as untold billions are dumped into electric batteries, their lifespan will continue to increase, the lithium needed will likely fall, and supplies will last even longer.

For example, Green Car Congress talks about a study from the Lawrence Berkeley National laboratory:

On the order of 1 billion 40 kWh Li-based EV batteries could be built with the currently estimated reserve base of lithium, according to a recent study by researchers from Lawrence Berkeley National laboratory and the University of California, Berkeley.

And there's more:

Researchers from the University of Michigan and Ford Motor Co. report in Journal of Industrial Ecology that even with a rapid and widespread adoption of electric vehicles powered by lithium-ion batteries, lithium resources are sufficient to support demand until at least the end of this century.

Electric cars are inevitable. They'll keep growing going forward, and companies like Tesla (NASDAQ:TSLA) will be in a great position to reap profits. Fears of the end of civilization because we can't replace batteries is just paranoia and not based on the hard data.

What This Means For Investors

In 50 years, people who made big bets against the ability of the electric vehicle to survive and prosper will be lucky if they keep their shirts. The electric vehicle is the next logical step for transportation, and the rising cost of oil all but insures this.

Investors looking for more direct exposure to electric vehicles can invest in:

Tesla Motors. This company is easily ahead of the curve by a decade or two, and that provides a unique opportunity as well as a potentially stronger risk. Predicting the future is all but certain, and even though the electric vehicle is inevitable, that doesn't mean Tesla is inevitable. Car companies are historically notorious for being difficult to keep afloat.

Either way, right now the cars Tesla makes are extremely high quality, gorgeous, and are gaining popularity. Tesla's revenues have grown gradually, though they completely missed projections by roughly 50% last month. That shows that the waters are choppy and that Tesla is anything but a perfect bet. Still, they're doing the best job currently on the market for producing EVs.

Traditional Producers. Traditional car companies like Toyota (NYSE:TM) and GM (NYSE:GM) can see a boost in EV sales going forward eventually, but it's far too early to make big bets on these mammoths just because of the EV market.

Rockwood Holdings, Inc (ROC). Rockwood produces roughly a third of the Lithium supply, so if you're looking for direct production exposure, this is one of the best to keep your eye on. It pays a modest dividend, has a nice large multi-billion market cap, and has exposure to a lot of other chemicals and mining operations for diversity. Still, if you're making a bet on Lithium, it's going to need to be a longer-term bet, because the Lithium trend is multi-decade.

Sociedad Quimica y Minera (SQM). This is one of the largest lithium companies in the world, though they've been having problems with contracts in Chile recently. Wait for the dust to settle before making any bets. They also produce industrial chemicals and fertilizer, which is another bet for those looking to cash in on food production as the world moves toward potential agricultural shortages.

I'd rather show up a little late to a sure thing rather than early to a big bet. These are companies and trends to watch for. As the EV market continues to grow, it's a good idea to begin looking for entry points to get exposure to one of the biggest automotive and energy trends humanity has seen yet.

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.