Australia is one of the leading lithium producers amongst eight countries and contributes significantly to the global production. There are two major resources producing Lithium and are either brine-based deposits or hard-rock mineral deposits. It is to understand that brine-based lithium can be used directly in end-markets, while hard-rock lithium concentrates need to be refined further before use in the end market.
The most recent uplift in demand for lithium-ion batteries has been associated with the rise in demand of electric vehicles because they are rechargeable in nature. In this regard, Lithium-ion is noted to move from the negative electrode to the positive electrode during discharge and has the potentiality to move back again when recharged. Over the years, most of the countries like Paris, Mexico, and India, etc. are moving towards electric vehicles because the Government wants to reduce pollution in their respective regions and reduce the dependency on fossil fuels. For that, the Government is pushing EV industry by providing incentive schemes which will support the demand of lithium in the years ahead. Then, countries like China are aiming to thrive on lithium battery for various uses. It has been forecasted that Electric buses are will cover half of the world fleet by 2025 and this will be triple within seven years and most of them will be in China. The total number of electric buses in services has been estimated to be about 1.2 million in 2025, up from 386,000 reported last year and this is equivalent to ~ 47% of the worldwide city bus fleet. Given these trends, end consumer behaviour is bending towards electric vehicles, and thus the market seems to be having an interest in stocks in lithium sector. Lithium-ion batteries have been estimated to make up 35% of total use of mined lithium worldwide. The significant usage for lithium has been into rechargeable batteries for mobile phones, laptop, digital camera and electric vehicles. Moreover, it has also been used in lubricant greases, glass, ceramic glazes and health products.
In the beginning of 2018, the speculation that lithium prices are set to fall given the demand-supply scenario being shaken up, led the lithium stock prices fall quite a bit after soaring significantly in 2017. During 2006-2016, the lithium prices have doubled to $6,000 per ton from $3,000 per ton.
Taking the current scenario with a pinch of salt, many investors have raised concerns over the stocks in lithium sector. Nonetheless, lithium is a precious commodity, and most of the reserves still do not contain enough amount of lithium for commercial use and some of them don’t even produce sufficient high-grade lithium for batteries. Therefore, key lithium companies with innovative solutions, healthy fundamentals, and implementing strategic moves including alliances and joint ventures (JV) with the technology companies to ensure reliable, regular supply of lithium compound to battery industries and vehicle manufacturers, are being assessed from investment standpoint. Moreover, many government bodies and agencies are taking preventive measure against unfair advantage in the lithium battery rat race. One such move has been taken by Chile’s development agency, Corfo, who has requested Chile’s antitrust regulators to reject the selling of Nutrien’s stake in Sociedad Quimica y Minera de Chile (NYSE:SQM) to China’s Tianqi Lithium on the grounds that it would give China an unfair advantage in terms of the competition to have resources to develop electric vehicles.
Coming to lithium production scenario, as per the US Geological Survey, Worldwide lithium production improved by around 13% to 43,000 tons in 2017 from 38,000 tons in 2016 on the back of increased lithium demand for battery applications. In 2017, lithium production in Australia registered growth of ~ 33.6% to 18,700 tons with new Spodumene operations coming on-line and ramping up production of concentrate.
World Mine Production and Reserves (Source: U.S. Geological Survey)
While the world is moving towards zero emission, the battery storage will be crucial for energy demand, and thus the outlook for lithium pricing can be expected to stay positive in medium term.
Given this interplay of supply -demand scenario and other macro factors, a look at the ASX lithium stocks points to up and down movements given the changing lithium paradigm. In the last six months, stocks for the lithium miners such as Minerals Resources Ltd (ASX: MIN), Orocobre Ltd (ASX: ORE), and Galaxy Resources Ltd (ASX: GXY) have spiked up 14.23%, 39.05%, and 35.5%, respectively, as on March 26, 2018. However, with supply expected to flood the market, the stocks have been touching the ground with a respective slip of about 17.22%, 16.01%, and 16.11%, as noted in the last three months. However, we need to be mindful of the fact that the lithium demand is still decent with acceleration in the EV market. Thus, the success of lithium miners will hinge on production capacity, strategic long-term alliance and other developments such as expanding exploration capability, and healthy fundamentals. For instance, GXY’s Mt Cattlin project is a fundamentally strong project capable of yielding cash benefits. With this backdrop, the scenario for lithium sector is worth a watch.
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