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Is Lithium a good hot spot in commodity market?

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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.

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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.

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Mine Production and Reserves (Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2016)

 

Lithium production

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.

 

Current scenario

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).

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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.


Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2016 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.

 

 

Innovation and path to success for technology companies

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It is very well said that early investments in technology companies can yield lucrative returns. The success of technology companies is mainly dependent on their product differentiation and innovation given the rapidly changing market dynamics observed across the world including Australia. Accordingly, we believe that the technology companies in Australia which are catering to this market needs are set to grow further in the coming years. No doubt that all sectors generally get a hammering when market tumbles as also seen in year 2015 when the market was largely hit by macroeconomic factors but there were players in the technology sector such as SEEK Ltd, REA, SMS Management and Technology and Catapult that depicted stability. We also note that growth in technology sector has been lately boosted by factors such as digitisation of information, development of cloud computing services, and use of smart devices. In the last six months, S&P/ASX 200 Info Tech (INDEXASX:XIJ) has moved up 6.8% as at April 22, 2016 against 2.15% drop in S&P/ASX 200 (INDEXASX:XJO).

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Technology Sector’s Industry Movements as on April 22, 2016

 

Mark Warburton, a senior managing director at Macquarie Capital in the tech space, comments that the arrival of the cloud and SaaS businesses had allowed new software players to challenge incumbents, disrupt traditional models and accelerate their growth plans. In a separate report by MGI research, growth in Agile Monetisation Platforms (AMPs) sales in Australia, New Zealand and Oceania are seen rising to $413 million in 2020 from $88 million in 2016 (CAGR: 47.18%). AMP includes nine categories: agile billing, financials, order management, e-commerce, customer support, CPQ (Configure-Price-Quote), contract management, revenue recognition, and mediation. XERO FPO NZ (ASX: XRO) is positioning itself for the accounting Niche, which offers accounting software over the internet, against all the legacy providers of accounting software who did this via annual CD-based updates. This makes the company one of the new breed of software as a service or SaaS companies.

 

Meanwhile, based on a report by Research and Markets, global radar systems and technology market is expected to grow at a CAGR of 3.43% during the period 2016-2020. At the same time, Nearmap Ltd is set to launch its next generation HyperCamera 2 technology in second half of financial year 2016 to further enhance its customer value proposition and positioning against competitors. The first commercial imagery from the same is expected by June 30, 2016. The launch of this new innovation will lead to expanding the size of its available market and premium product will increase revenues. In its Australian business, the company has increased awareness through radio advertising campaign and added marketing automation to its online presence.

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Nearmap’s Growing revenue (Source: Company reports)

 

On the other side, given the technology boom in 1999 and 2000, a lot of companies including job search website Seek and real estate search website Realestsate.com marked their presence and drove significant earnings growth. Software businesses with global application tend to be quickly scalable and hence receive attractive valuations. SEEK Limited (ASX: SEK) is targeting the job market in Australia and is continuously launching new products in order to increase its breadth of ad opportunities. Also, it looks to promote SEEK’s candidate database solutions and refine algorithms and data analytics to improve matching of hirers with relevant candidates. Over the medium to long term, SEEK has an exciting product road map of new products and services which are foreseen to directly or indirectly contribute to revenue growth and have global applicability. Seek’s target market is also continuously growing wherein the number of online job postings in February increased across industries except labourers according to a recent report published by the Department of Employment. The government’s Internet Vacancy Index (IVI), dipped by 1.9% to 162,055 in seasonally adjusted terms in February, leaving the annual increase at 4.9%. Professional positions, up 10% to 44,763 openings, recorded the strongest growth of all groups surveyed.

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Seek’s growing performance (Source: Company reports)

 

As per the Australian real estate market, REA Group Limited (ASX: REA) is targeting the online property market and has been expanding across the international regions also other than Australia via acquisition of all the shares in iProperty Group Limited (ASX: IPP). REA Group recently revealed its strategic partnership with hipages which will allow both market-leading companies to integrate their products into enhanced consumer experiences. This partnership follows News Corp taking a 25% stake in hipages in December 2015.

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Freelancer Key marketplace highlights (Source: Company reports)

 

Moreover, freelancing has been gaining momentum as an estimated 32% of Australia’s workforce took part in the country’s freelance economy in 2015. On these lines, Freelancer Ltd (ASX: FLN) is thus enhancing its business and even completed the acquisition of Escrow.com which is a strategic step for the company. The group also added Chinese Yuan as a supported currency as well as Chinese payment gateways Alipay and UnionPay and a range of new gateways across Europe and Canada. This addition is mainly due to the fact that within 3.3 billion people currently online, 22% are from China.

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XIJ Daily Chart (Source: Thomson Reuters)

 

With the proliferating growth in technology sector, various investors in Australia now aim to have some exposure to said sector, particularly driven by IT, looking at the industry balance likely to trend towards other developed markets yielding high returns. The selection however needs to be prudently done looking at the risk diversification, company’s development cycle and capital structure, and technology specialization attributed by innovation.


Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2016 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.