Is lithium out of power?

The battery metal has taken off, but it’s unlikely demand will outstrip supply in the long run.

Summary: Demand for lithium has shot through the roof, but investors should consider these three things: the global market is very small compared with other metals, those currently mining it could up production, and the big miners like Rio Tinto are considering jumping in – while the need for the metal will increase, so too can output.

Key take out: The boom might not be over, but investors should be aware that it’s likely there’s only a year of gains left before things slow.

Key beneficiaries: General investors. Category: Commodities.

The boom in lithium-exposed mining stocks is not over, but it is certainly getting closer to its use-by date.

Competing forces are driving interest in lithium, a super-light metal used in the production of long-life batteries such as those powering electric cars and used to store solar energy.

Potentially, lithium could become the “new petroleum” with soaring demand as the world embraces renewable energy as a viable alternative to burning fossil fuels.

It’s that upside, coupled with reports of the lithium price more than doubling to $US20,000 a tonne, which lies behind the surging share prices of stocks such as Orocobre, Pilbara Minerals, and Galaxy Resources.

Orocobre, the most advanced of the local producers with a mine in Argentina, has risen by 240 per cent in six months, from $1.35 late last year to latest sales at $4.65. Pilbara, which is moving towards production at a project in WA, is up by 190 per cent from 22c to 64.5c, and Galaxy, which has re-started production at the Mt Cattlin mine also in WA, is up 400 per cent from 10c to 50c.

Orocobre price, 3 months: 

Fabulous profits have been earned by speculators who jumped aboard the lithium express in its early days.

It has not been quite so good for late arrivals. The rush into lithium stocks has slowed since Eureka Report took a look at the lithium sector two months ago (read more here: Who’s who in the $2 billion lithium boom, April 13, 2016).

Orocobre has continued to do well, but at a slower pace, adding another $1.45 (45 per cent) to its price of $3.20 in mid-April. Pilbara has slipped 3.5c lower from its April price to 64.5c, though it has also successfully raised $100 million in fresh capital, and Galaxy has added 16.5c (50 per cent) from its April price of 33.5c.

Compared with the rest of the market those recent price rises are exceptionally good, but the trend over the past two weeks has been slowing thanks to a combination of the rush up being too far, too fast, and because the realities of the lithium market are starting to dawn.

The first sobering point about the market is that hardly anyone has actually sold a tonne of the lithium carbonate (the metal’s most commonly traded form) for the $US20,000/t widely reported.

Sales as high as that have been made, but in small quantities and between Chinese traders in the material. The long-term, contract price, for lithium carbonate (often referred to as LCE) is around $US7000/t.

The other important point about lithium is that last year’s shortage is being filled by rising production from traditional industry leaders, the big four comprising Chile’s SQM, China’s Sichuan Tianqi Lithium, and two US companies, FMC Corporation and Albemarle Corporation.

The big four of lithium misread the market last year and failed to lift production fast enough to satisfy demand, with the result that global output of an estimated 171,000t of LCE was 13,000 tonnes less than estimated consumption of 184,000t – with the shortfall met by drawing down on stocks, which produced a corresponding price spike.

Today, the market for lithium is back in balance, best demonstrated by a telling comment from John Mitchell, president of lithium and advanced materials at Albemarle when I spoke with him last week.

When asked whether he was receiving requests from customers who were concerned about the supply of lithium he said: “Our ‘phone doesn’t ring from battery manufacturers saying they don’t have access to lithium. If there is anyone out there in that position, give me a call.”

There are three other important points for investors to consider about lithium:

  • Compared with other metals such as copper or zinc, it is a tiny business and if last year’s consumption of 184,000t was all sold at the long-term contract rate it valued global lithium output at just $US1.3 billion. Copper production was valued at $US85bn.

  • Most established lithium mines are operating at well below capacity which means it is easy for output to be increased, and

  • Big mining companies which are not currently producing lithium are thinking about it as a future growth opportunity with Rio Tinto committing another $US20m to explore its Jadar prospect in Serbia, taking the total invested to around $US90m.

As with many previous mining booms, the rush into lithium has been triggered by a sharp increase in demand and a slow response from traditional producers which has led to a short-term price spike.

The supply gap is being filled and while it there will be opportunities for new producers, especially those that sign an offtake agreement with customers keen to break free of the big four.

But, offtake agreements are generally treated as long-term contracts and that means receipt of the long term price, which in the case of lithium is $US7000/t – not the $US20,000/t which has attracted headlines.

And then there’s the question of latent supply, or the ability of the big four to satisfy global demand from existing mines which are currently being worked at well below capacity.

Albemarle, for example, is lifting production of LCE at its Atacama mine in Chile from 30,000t a year to 50,000t, but has the potential to eventually produce 400,000t annually from that one projects, more than double last year’s global consumption.

No-one doubts strong and rising demand for lithium, with Deutsche Bank estimating in a report produced late last month that the compound annual growth rate will be around 18 per cent over the next three years, taking demand to 280,000t of LCE.

“However, we believe supply can respond,” the bank said in a report headed: “Global majors continue to respond”.

Indeed they are, and that’s why the boom in Australian lithium exploration stocks and emerging producers is a case of make hay while the sun shines, which it probably will, but only for another 12 to 18 months.