The mineral is a hot commodity.
(Reuters) – Lithium is shaping up to be The Next Big Thing.
Prices are going stratospheric, junior miners are rushing to stake claims on future supply and investment websites are glowing red hot with speculation about the metal’s prospects.
The Global X lithium fund, one of the very few ways to get in on the action, has gained 25% over the past three months with assets under management leaping from $41 million to $68 million since the start of the year.
It’s a far cry from the 1990s, when the U.S. Department of Energy was selling surplus stocks and mines were closing as the nuclear arms race wound down, reducing demand for one of the materials used in hydrogen bombs.
But the fortunes of this most versatile of metals were transformed in 1991 when Sony commercialized the lithium-ion battery, now an integral part of just about every electronic device.
Now, however, it looks set to scale even greater heights as carmakers, led by Tesla, step up efforts to mass produce electric vehicles using an enhanced version of that same technology.
Lithium could become the key material in the coming green revolution of storable energy.
But the lightest of metals in the periodic table is shrouded in darkness when it comes to its pricing mechanics.
If lithium is going to become an integral part of the global energy supply chain, its market opacity is a big problem.
WHAT’S THE PRICE?
Start with the most basic of questions. What is the price of lithium?
More than $20,000 a ton on the Chinese spot market for battery grade material, according to research house CRU.
It’s about $7,000 for Chinese imports of carbonate — the most traded form of the metal — but only $5,000 for U.S. imports, analysts at Macquarie Bank said.
Whichever measure you use, prices are on the up. CRU estimates that the Chinese spot price has almost tripled from $7,000 the middle of last year. Macquarie, meanwhile, notes that Chinese import prices for Chinese carbonate and export prices for hydroxide have hit record highs.
It’s a bit confusing, isn’t it?
There are two problems here. The first is the bewildering number of products that can be made from lithium, ranging from lithium stearate (industrial grease) to lithium fluoride (aluminum smelting) to butyllithium (organic compounds).
All are normally converted for pricing into lithium carbonate, largely used for battery manufacture.
But even then the picture is complex.
There are different types of carbonate, with lower-grade material for the ceramics and glass industries, for instance, while higher-grade material used in batteries. Nor are lithium-ion batteries themselves homogenous. There are five major types, each using a different lithium compound.
Things become even murkier because the second problem with lithium pricing is that most trade is conducted between a small number of producers and their customers.
There is no exchange trading, no terminal storage market and only an extremely limited spot market.
This means that price assessments such as those from CRU and Macquarie rely first and foremost on published trade volumes and trade values, a statistical sleuthing exercise made more difficult by the complexity of the lithium product chain.
The (highly variable) bottom line is that lithium pricing is extraordinarily opaque.
That opacity is a direct result of the way the lithium market is structured. Only four producers control about 85% of supply, Macquarie says.
Chile’s SQM and U.S. companies FMC Corp and Albemarle Corp dominate the production landscape, extracting lithium from salt lakes in Chile and Argentina. Albemarle also operates a brine operation in Nevada.
The fourth producer is Australia’s Talison, which produces lithium at the Greenbushes mine in Western Australia. But it is hardly an independent, being 49%-owned by Albemarle and 51% by China’s Tianqi Lithium, which takes almost all of the mine’s output for processing in China.
This oligopoly poses a real challenge for Tesla, will need about 27,000 tons of lithium carbonate a year to reach its sales target of 500,000 vehicles a year by the end of 2018. That equates to 16% of global consumption last year, Macquarie estimates.
Tesla seems to be placing its faith in a new generation of producers, signing prospective off-take agreements with Bacanora Minerals, owner of the Sonora project in Mexico, and with Pure Energy Minerals, which is working on the Clayton Valley project in Nevada.
Interestingly, in announcing these deals, both miners said that material would be supplied at a predetermined level below current market pricing in alignment with Tesla’s goal to reduce the cost of its batteries.
There is no shortage of other companies staking their claims to profit from the expected lithium rush.
But does the world actually need more lithium?
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It seems obvious that it will, given the limited number of suppliers and the forecast rise of the electric car.
That’s why prices are so strong, isn’t it?
Well, not necessarily.
Macquarie Bank argues that one of the reasons the price is so strong is because the oligopoly is running well below capacity.
Hard production figures are difficult to come by since none of the major operators publishes them.
But based on Australian exports of lithium concentrate, Macquarie suggests that Talison was last year operating its Greenbushes mine at only 60% of capacity.
“We believe existing producers will be forced to lift volumes to protect market share and keep new entrants out,” the bank said in a report last week, adding that it expects prices to peak in late-2017 and then start heading lower.
It’s a sobering assessment for a metal that is creating such a buzz in the blogosphere.
There is an obvious analogy with the rare earths mania of a few years ago, when excitement about the demand outlook for esoteric metals such as neodymium boosted prices only for investor exuberance to be dashed by a realization that there was more than ample supply to feed that demand.
Might lithium go the same way?
Should we be worried by a future supply squeeze or is supply already being squeezed by dominant producers?
Lithium’s market dynamics are so dark it is almost impossible to say with any degree of uncertainty.
That’s a problem for investors.
It’s also a big problem for the likes of Tesla, who will be at the mercy of those market mechanics, at least until some bright spark invents a new type of battery.