Lithium’s vital role in the energy transition sends prices to record highs. How to play it
All-electric homes, cars, and buildings will run on clean energy in the future. This all-electric future relies on many raw materials. But, lithium is perhaps more important than any other. The key metal’s prices have risen significantly in the past year, as demand projections indicate that it will outstrip supply. There are automakers that promise huge fleets of electric vehicles. There are many projections about the adoption rate for EVs. The consensus is that EVs are going to be a major threat to the existing dominance of the internal combustion engine on roads over the coming decades. The mining industry is resource-intensive and capital intensive, so there are real limitations. Permitting processes are often complicated and local opposition can prevent projects from moving forward for many years. Due to the high amount of energy per unit that lithium offers, Lithium has a high demand. There are many different battery chemistries. Add in batteries for energy storage – both residential and utility scale – and a lot more lithium is needed. The International Energy Agency predicts that lithium demand will rise by 400% by 2040 to reach the Paris Agreement’s goals. David Deckelbaum, Cowen’s managing director, stated that there are not enough supply projects to meet the growing demand. The lithium gains have been fueled by this disconnect between the current situation and projections of what will be needed. Benchmark Mineral Intelligence reports that global lithium prices rose by more than 30% last year. It has been a steady climb. The prices of goods and services have increased by more than 50% in 2022. This is a new record. The move was even more drastic in some areas. Last year, the Chinese spot-market for lithium battery grade soared by over 500%. China’s spot price for lithium battery has risen more than 500% since March, when it reached a new record. But, this decline is still accompanied by Covid lockdowns.[G]Lobal prices continue to rise as international contracts tend to follow the Chinese market. So the Q1 rally outside China is still being felt,” said Daisy Jennings Gray, Benchmark senior price analyst. Lithium shortages are not the reason for supply worries. Lithium is not a rare resource and can be found around the globe. It’s currently most abundantly extracted in South America, Australia. China is the dominant country in refining, processing and marketing lithium. U.S. supply of lithium is vital to the energy transition. The Biden administration stressed the need for U.S. production. To encourage the production of essential materials in America, the White House incited March’s Defense Production Act. The White House also allocated $3.1 billion for U.S. refinery capacity. Morgan Bazilian from the Payne Institute for Public Policy said in March that “such a move of the White House sends useful signals to markets, but actions such as new feasibility studies, supporting existing operations, will not make a material change to the sector nor the supply chain issues.” However, he acknowledged the importance of optics. He said that invoking an old wartime tool as an executive tool suggests a level of seriousness. Lithium Americas’ CEO Jon Evans knows well the difficulties facing America’s mine industry. Since its Nevada Thacker Pass mining operation was shut down in 2008, the company has worked tirelessly for over a decade. Evans plans to begin construction on Evans’ mine in December, despite opposition from Native American tribes and environmentalists. “As far as the ESG implications of domestic mining … it’s a complex tradeoff across time horizons where both environmental and geopolitical/national security risks must be taken into balance,” Morgan Stanley said in a recent note to clients. The permits must be obtained before a mine can begin production. Vance Brown is the managing director of Williams Jones Wealth Management and portfolio manager. It can take up to five years for a new greenfield lithium mine to start producing. According to Vance Brown, managing director and portfolio manager at Williams Jones Wealth Management, “We do not expect a material supply reaction for the next twelve-18 months.” The only significant facility currently in operation in the U.S. is Albemarle’s Silver Peak lithium mine, Nevada. This boost in profits isn’t the first time that lithium prices have risen. Between 2017 and 2018, the metal saw a rise in value, before eventually falling as the market was oversupplied. Market misalignment was caused by EV demand that didn’t meet forecasts. Producers gradually reduced their expansion plans and shelved them over the following years. This slowly ate away at an once-oversupplied market. Due to the contract structure, high spot prices are not always a benefit for miners. However, the rise in prices is starting to pay off for companies, as evident by the quarterly updates of Albemarle’s and Livent. Cowen’s Deckelbaum stated that “they both shatter the quarter in terms EBITDA projections.” This is probably the most appealing valuation of these names ever.” Albemarle reported that its first quarter revenue increased 36% year-over-year to $1.13 million. The quarter saw net sales of lithium increase 97% to $550.3million. To capture even more upside, Albemarle is changing the terms of its contracts as lithium prices rise. Albemarle CEO Kent Masters stated that the contract renegotiations are an evolution in Albemarle’s pricing strategy. He spoke about it during a telephone call following first quarter earnings results. He stated that “We are much more indexed today to the market than we were one year ago and that is by design.” In the future, Livent, a Charlotte-based company, anticipates that sales will reach $5.2 billion to $5.6 billion. That’s up from $4.2 billion to $4.5 trillion in prior guidance. Livent shares rose 30% after publishing its quarter-end results on May 4. Livent posted sales of $143.5million during the period. That’s an 17% increase over the preceding quarter and 56% more year-over year. Now, the company expects to generate revenue between $755 million and $835 millions in 2022. That’s up from previous forecasts that ranged from $540 million to $600million. Williams Jones’ Brown stated that both ALB and LTHM were two major lithium producers in the world and showed a significant increase in profitability. This has significantly raised their guidance for 2022. He said that the effects of the 7X price increase for lithium over the past 18 months have been reflected in the income statements. These strong results are not enough to offset a market selloff that has seen stocks fall sharply this week. Market as a whole is in decline, with growth-oriented and tech stocks suffering huge losses. These companies are less likely to make future profits due to rising rates. Investors who feel exposed in the market have a tendency towards safer assets. Deckelbaum stated that lithium stocks were thrown out with all the baby stuff. Inflationary pressures Just as the group might be unfairly hit by trends in the market, it’s also not immune from what’s playing out in the economy — in this case, inflationary pressures. At a point too much lithium causes a decline in the demand. Automobile manufacturers are forced by rising raw material costs to increase their costs. They then try to pass the higher prices on to customers. It can lead to a decline in demand. Bernstein’s report, which relies on data from Nio (a Chinese-based manufacturer of EVs), found that 42% of EVs are made up of batteries. The firm sent a note to its clients saying that they suspect that many OEMs are having a heated debate about how to best position themselves in the battery business. The surging price of lithium is well-known to auto companies. “The price of lithium has risen to absurd levels!” Elon Musk, Tesla’s CEO said this in a April 8 tweet. “Tesla might actually have to get into the mining & refining directly at scale, unless costs improve.” Although it remains to be determined if Tesla will enter the lithium mining sector, the comments made are noteworthy. Apart from Albemarle & Livent, China-based Ganfeng Lithium and Chile’s SQM are other key players. Piedmont Lithium is also available. Both are focused on expanding U.S operations. Neither has yet produced lithium. Sound View Wealth Advisors’ partner Eddie Ambrose stated that although lithium looks like a great growth story, it is still to be determined which companies will win. So rather than bet on individual stocks, he parks capital from his growth-oriented investors in the Global X Lithium & Battery Tech ETF . It currently manages $4 billion of assets. Top holdings include Yunnan Energy and Eve Energy, Yunnan Energy as well as Panasonic Holdings and TDK Corp. Ambrose stated that while we know lithium will survive, it is not certain if the companies in question will survive.