The commodity slaughter from the last five years has left almost no metal unscathed. Almost.
There is really a notable exception. Little-known lithium has been a solid performer during the last many years, and has simply skyrocketed recently because of expectations of soaring demand from electric vehicles and market distortions in China.
“You could argue it’s done much better than anything,” said Jon Hykawy, president of Stormcrow Capital Ltd., which tracks the lithium market. Having said that, he noted the sky-high prices coming out of China don’t tell the whole story.
The lithium marketplace is tiny in the grand scheme of things, with total need for roughly 180,000 to 200,000 tonnes a year. It’s not an exchange-traded commodity, and is instead sold in direct contracts between suppliers and users.
But it is a space investors have been watching closely for a long time because of its crucial use in batteries, designed for planet. As Tesla Motors Inc. along with other automakers ramp up electric vehicle production in the future years, demand for lithium batteries is for certain to rise. Goldman Sachs called it the “new gasoline.”
That is reflected in the prices. Battery-grade lithium carbonate, which sold for about US$5,800 a tonne in 2011, was opting for US$6,880 at the end of 2013 and around US$8,000 today. That performance looks incredible when matched up against nickel or aluminum.
Related
- Sentiment muted at PDAC conference despite indications of life in mining industryPDAC 2016: Mining downturn poses enormous threat to NWT, premier says
-
-
-
China is really a story unto itself, as lithium prices have doubled in the last five months to absurd levels of around US$18,000 a tonne. You will find concerns about inventory shortages in China as domestic companies are no longer getting steady supply from an Australian operation they relied on for years. Consequently, they are desperate to get material and paying whatever needs doing to secure some.
Hykawy said lithium demand could effectively double to 400,000 tonnes annually in a decade. Other forecasts are more modest. But the overall outlook continues to be healthier than most metals, which are being rattled because of oversupply and slowing demand from China.
No other commodity can keep up with lithium. Rare earth elements, which enjoyed one of the greatest commodity bubbles ever not too long ago, have dropped a lot that one of the very most well-known companies within the space (Avalon Rare Metals Inc.) recently changed its name to Avalon Advanced Materials and shifted its focus to lithium.
Even graphite, another metal whose fortunes are closely associated with electric vehicle demand, has performed poorly.
The Tesla gigafactory isn’t yet pulling around the chain of supply, and you are already seeing these crazy (lithium) prices.
“You would have thought graphite would rally like lithium, since it is included as well during these batteries in large volume,” said Guy Bourassa, leader of Nemaska Lithium Inc., a junior miner having a project in Quebec.
“But the capability of the existing (graphite) producers is such that it may satisfy the increase in demand. That’s not the case within the lithium sector.”
Lithium demand from customers has been growing steadily by about nine or 10 per cent annually within the last 5 years. To date, supply has been sufficient to meet demand. But as demand rises alongside electric vehicle production, it will be tough for the supply side to maintain.
“It’s putting a lot of onus on current producers plus some from the juniors to get their act together,” Hykawy said.
The lithium market is an oligopoly with only four companies controlling the majority of supply: Albemarle Corp., SQM SA of Chile, FMC Corp. and the Chinese firm Chengdu Tianqi Industry Group.
There are only a handful of juniors in almost any position to increase supply within the next many years, including Orocobre Ltd., Nemaska, Galaxy Resources Ltd., General Mining Corp., Neometals Ltd. and RB Energy Inc. (that is currently in creditor protection).
Bourassa said there are four lithium development projects currently permitted (including Nemaska’s), and each one would have to reach production to meet a potential supply gap of 100,000 tonnes in the next few years.
That won’t be easy. The collapse of RB Energy, which had a liquidity crisis in 2014, demonstrated the challenges of bringing these projects to promote. Orocobre has faced problems ramping up its operation. And the businesses with lithium projects will have to raise significant capital in what remains a frightening marketplace for junior mining companies.
Of course, not every signal is bullish. Lithium skeptics points out that the electric vehicle marketplace is still something of the question mark. Before the demand materializes, it’s impossible to know how quickly consumers will embrace these vehicles. And while everyone in the lithium clients are excited about Tesla’s gigafactory in Nevada, which is expected to produce more lithium ion batteries each year compared to world produced in 2013, the factory won’t begin production until the coming year and isn’t expected to hit full capacity until 2020. Hykawy noted that gigafactories will replace some smaller production sites which will shut down, so that they don’t necessarily represent an enormous shift in demand.
But for now, the sheer excitement of what looks to be around the corner is driving major momentum in this industry.
“The Tesla gigafactory is not yet pulling on the chain of supply, and you’re already seeing these crazy (lithium) prices,” Bourassa said. “It’s an interesting spot to be presently.”
pkoven@nationalpost.com
Twitter.com/peterkoven
