Lithium – Hot new commodity
With the global energy sector bearing the brunt of volatile commodity prices, Lithium is one commodity that is out-showing others in the past two years. As we understand, Lithium comes in two forms, namely, lithium hydroxide and lithium carbonate and lithium hydroxide typically sells at a premium to the latter form. Considering that a lithium brine mine has a good lead time from evaluation and construction standpoint, the battery markets have taken an edge over putting a pricing hammer on other primary uses for lithium (such as ceramics, lubricants, etc.). Past few years have witnessed a good surge in Lithium demand with an increase in the global requirement for rechargeable batteries. Such a drift primarily is owed to carbon legislation and air quality concerns prompting car manufacturers to roll out electric vehicles. Thus, use of lithium in the form of large scale batteries for portable applications and electric vehicles has gained momentum. It is reported that global consumption of lithium has increased at a CAGR of around 11% between 2010 and 2015, according to a recent CRU research report published in April 2016. With forecasted rising demand in lithium and tight market conditions, Chinese spot prices have increased from almost $7,000 per tonne in September 2015 to more than $20,000 per tonne more recently.
Lithium Price Renminbi per metric tonne (‘000) (Source: Financial Times)
The rising demand
According to the CRU report, the next five years are said to mark a great surge in Lithium market driven by high usage in battery sector and demand from Asia. In 2015, lithium ion batteries (LIB) represented almost 44% of the total demand as they have become the dominant cell type for rechargeable batteries since the early 2000s. Demand is broadly supported with lower manufacturing costs which have dropped recently. Looking ahead, CRU expects the battery sector to be the largest lithium consuming sector in 2018 and it is likely to account for almost 55% of the total demand by 2020 leading ahead of traditional industrial applications, such as the manufacture of ceramics and glass. Within the battery sector, a majority portion of the demand is seen originating from the electric vehicles (EV) sector which is seen growing at a CAGR of 11% in the next five years. For the electric vehicle industry alone, Goldman Sachs predicts that for every 1% rise in EV market share, lithium demand will rise by 70,000 tons per year. Furthermore, Goldman Sachs predicts that the lithium market could triple in size by 2025 just on the back of electric vehicles.
Another factor said to drive the lithium demand is the rising need for energy storage which is led by high global installed capacity of renewable energy. This is not possible without sufficient back-up power or storage such as large scale batteries. As per CRU’s primary energy model, renewable energy generation may grow at a CAGR of 11% from 2015 to 2020.
Geographic spread of lithium demand
Asia has been outlined to steer demand with the presence of producers of LIB’s for electronics and EVs. Japan LIB manufacturing has a market share of almost 15% in the global scenario, while South Korea accounts for almost 20%. With 80-90GWh per year of LIB production capacity worldwide, more than 85% of this is located in China, Japan and South Korea. In 2015, more than 50% of fully commissioned LIB manufacturing capacity was located in China which is equivalent to more than 40GWh per year.
Mine Production and Reserves (Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2016)
Argentina is home to the precious commodity whose price and demand are seen to soar. Lithium (also known as “white petroleum”) is found majorly in South America’s lithium triangle (encompassing Chile, Argentina, and Bolivia). However, until recent times, this was of no benefit to investors as Argentina and Bolivia lacked proper business environment, while Chile relied on control over lithium output. The scenarios seem to have changed now with Chile witnessing resource management with early stage mining companies to electric carmakers like Tesla coming into picture. Latest reports reveal that about 400,000 orders of the new Tesla model (lithium-based), at a cost of $35,000 each have been made. Investors in Argentina are also hopeful that the new Mauricio Macri government that took over in December 2015 may bring a positive turnaround to the economy. Argentina, being a do-not-invest zone for 10 to 12 years, now is said to have a major opportunity to build a lithium export business.
The recent developments whether pertaining to electric cars in general or updates on lithium forecasts have boosted the lithium sector in the share market. According to a Citi analyst with the northern winter denting production of lithium in China thereby creating a shortage, the price is expected to continue rising over the next six months. Also Chinese suppliers are said to prioritise existing customers on term contracts leading to a very competitive market for any remaining spot material. As per industry analysts, lithium price is expected to perform better in 2016. Recent lithium discoveries in the Pilbara region of Western Australia have also led to dramatic price moves in some of the mining names because lithium pegmatites are outcropping on a number of these properties. For instance, Pilbara Minerals Limited (ASX: PLS) has surged about 108.33% this year to date (as at April 26, 2016).
PLS Central and Western in-fill drilling program (Source: Company Reports)
Lithium Australia NL (ASX: LIT) is another lithium mining company that has surged 246.67% in the last one year (as at April 27, 2016). What is seen here is a situation where demand is outstripping supply which is expected to benefit a lot of lithium producers. Of course, the balance between the demand surge for electric vehicles and the batteries, and lithium that can be actually produced may throw-up immense competition for existing resources. At the moment, Lithium commodity is witnessing a winning situation.
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