Identified as "critical enabling tech" by global leaders, lithium was first discovered in the 1800s and was mostly used in pharmaceuticals and ceramic glazes until after WWI when people started using it for other purposes, and nowadays lithium battery is considered strategic for a greener economy. Lithium carbonates and lithium hydroxide are the two main types of lithium produced globally; the largest miners and producers of lithium are in Australia, Argentina, Chile, and China.
Governments, globally, are advocating for cleaner energy, and one of the main drivers of air pollution is the emission from autos; therefore, the demand for greener vehicles is increasing in which lithium batteries play a vital role.
One of the most populated countries in the world, a refiner of 60 % of the world’s lithium, and the largest exporter of lithium hydroxide, China, had started offering subsidies in 2010 that was supposed to expire in 2020; however, they were extended to 2022. The subsidies included a subsidy-driven roll-out of new energy vehicles (NEVs) in order to incentivize the population to use greener alternatives including easier licensing registrations, as well as, approximately USD 100 billion worth of raw material processing and cell production subsidies to the producers. Those policies have set China as the most dominant in the lithium market; for example, in 2018, China dominated about 99 % of the global electric buses, while the US had 0.07 % of the global market only. Furthermore, the Indian government has proposed to sell electric vehicles only as of 2030.
In 2020, sales volume increased by about 40 % compared to 2019. In 2021, the NEVs increased by almost 158 % to about 3.52 M units mirroring the exponential growth of the demand for lithium. During December 2021, Lithium batteries set a record of 25,921 tons which is equivalent to a 68% increase y-oy, and a 31% increase m-o-m, and it is expected that the demand for the global lithium market to increase by 5 to 10 times during the next 10 years.
The increase in demand for electric vehicles caused distress in the dynamics of the demand and supply causing a scarcity of the metal; hence, lithium prices ascended sharply reaching new record highs; lithium futures prices increased by 171 % to a record of USD 38/ Kg, and in China, and lithium hydroxide monohydrate's cash prices increased by more than 1000 % since Dec 2020, and around 617 % y-o-y to reach Yuan 49350 which is almost USD 78071/ metric ton during March 2022, as seen below in figure (1).
.png)
Figure (1)| Source: Trading Economics (March, 2022)
Investors trade in companies that are involved with lithium mining, production, or in companies that rely on lithium as one main input such as electric car manufacturers or in electric storage. Lithium stocks rallied with the rising cost of lithium. For example, the stock price of Sociedad Química y Minera de Chile (SQM), one of the world's largest lithium producers, has increased by around 49 % since Jan 2021. Figure (2) below shows the performance of lithium stock prices starting March 2020 when Lithium prices started its hike, showing Jiangxi Ganfeng Lithium Co. Ltd (002466), the largest lithium producer in China, outperforming.
.png)
Figure 2| Source: Trading View (March 2022)
On the other hand, other than the closures of mines due to the COVID-19 pandemic, some lithium mines and future projects suspended operations due to associated environmental hazards; such as halting the Serbian Rio Tinto project which was meant to be one of the 10 largest global lithium producers; thus, affecting the supply. The shortage in supply is estimated to be 26 thousand tons in 2022, and it is estimated to increase by 11.5 times by 2030 to reach a shortage of 300 thousand tons; the shortage caused an increase of raw materials for companies that depend on lithium in their production. For example, Tesla (TSLA) had a y-o-y increase in the cost of sales by about 65 %; they quoted “We may experience issues with lithium-ion cells or other components manufactured at Gigafactory Nevada and Gigafactory Shanghai, which may harm the production and profitability of our vehicle and energy storage products.” The shortage affecting the industry of electric vehicles might slow down the transition to a greener economy.
The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.