🔋 Your Guide To Investing In Lithium, The Lightest Metal On Earth, & Is In Our Laptops, Phones, & Electric Cars

Brief Background

Lithium is a soft, silver metal that’s very reactive to air and water. It’s also considered to be the lightest metal, and you can even cut it with a knife! It doesn’t occur naturally in nature, but it’s available as a compound in rocks and brine pools. You might know about lithium because of the battery in your phone, laptop, or Tesla. What makes it the ideal choice to be used as a battery is that lithium-ion batteries has a high capacity to store energy in a small space, while still being lightweight. Fun fact: the three inventors of the lithium-ion battery won the Nobel Prize in chemistry in 2019.

It’s also worth noting that there are different grades of lithium, available as different kinds of compounds. The main ones used to make lithium batteries are lithium hydroxide and lithium carbonate, with carbonate making up most of the usage. There are two ways to harvest lithium from nature — brine pools (basically salt water) or spodumene (basically hard rock). Getting lithium carbonate from the brine pool is a matter of evaporating and extracting a similar lithium compound, before converting it to carbonate. In the case of spodumene, after it’s been mined, it needs further processing to produce the carbonate, which can be an energy intensive process.

What Can It Do For You

🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding lithium to your portfolio means owning an asset that tends to act differently to other asset classes, and even to other commodities. Furthermore, future long-term outlook for the metal is likely to be positive due to ever-increasing demand and further tech innovations.

💰 Profit. Lithium can certainly provide opportunities for profit for more speculative traders. At the time this was written, although the lithium market is currently in a state of oversupply, the supply and demand gap was at its peak in 2018. Seemingly falling production and increasing demand can certainly bolster prices, and in the long-term, consumer demand for all kinds of tech products that use lithium-ion batteries is expected to increase as electric consumption and energy storage demands increase.

Spot price chart of lithium carbonate priced in Chinese Yuan per ton.

Compared to a price chart of an ETF that follows a lithium index, comprised of companies with business activities related to lithium, whether it’s mining, exploration or battery production. Up until the recent meteoric rise in prices, lithium and its index price movements were somewhat similar. The recent rise may be due to the “Tesla effect”, distorting the relationship between physical lithium and index prices.

What Affects Lithium Prices

Compared to other commodities, the availability of lithium as a commodity in the financial markets is pretty limited, and thus the price of which (and therefore the factors affecting it) is not as transparent as it would be if it had been on an exchange, since current industry players believe it should be priced on a contract-by-contract basis, negotiated privately. Nevertheless, lithium is still very much affected by commodity fundamentals of supply and demand, and there are several key factors that are involved in moving the price of lithium:

• 🇦🇺(🇨🇱🇨🇳) Australian (+ Chilean & Chinese) Supply. Australia has really increased its lithium output and now produces roughly ~50% of the world’s lithium. Add on Chilean and Chinese production, and these three countries produce a staggering ~87%. Changes in production and supply levels in these countries can certainly have an impact on prices.
• 🚗 Electric Vehicle (EV) Demand. It would be wrong to talk about lithium without mentioning electric vehicles (EVs). This is because EVs represent the bulk of lithium’s end-use. There was a slight dent in demand in the first few months of 2020 mainly because of the pandemic. However, global EV demand are certainly increasing and picking up pace, especially in China and the EU.
• 🚗 The “Tesla” Effect. It would also be equally wrong to talk about EVs without mentioning Tesla. The staggering rise of Tesla’s stock price, the fierce consumer loyalty, its larger-than-life CEO have all contributed to changing consumer perceptions and mass adoption of EVs. This almost-sudden surge in demand has certainly contributed to lithium supply and demand dynamics.
• 🏛️Government Policy. Subsidies, tariffs and policies can all affect lithium’s price. In Europe for example, tax incentives, stimulus measures and subsidies helped boost consumer purchases of EVs. On the other hand, China, the world’s biggest car market, cut parts of its subsidy scheme. This arguably contributed to slower-than-projected EV sales in 2019. In the UK, a plan is under way to ban new petrol and diesel cars from 2030 onwards, which will certainly speed up EV consumer adoption here.
• 🔄 Substitution. Though not significant now, advances in alternative battery innovations could certainly take away from lithium’s market share. Examples include hydrogen and zinc-oxygen batteries. That being said, lithium-ion batteries are still considered to be the most efficient batteries today.
• 🛢️ Crude Oil Prices. Since EVs compete against normal diesel and petrol cars, lithium is essentially competing with crude oil, acting almost like a substitute. If crude oil prices are high, and therefore gasoline prices are high, consumers may opt to switch to EVs. In the supply side, refining and processing spodumene to produce lithium carbonate/hydroxide is an energy intensive process, and crude oil prices can certainly factor in to the cost of lithium.

World mine production and reserves for 2019 and 2020. Note that the US doesn’t release production numbers.
(Source: USGS)

World lithium production and consumption in metric tons. These numbers don’t include US production figures, since the USGS doesn’t publish them.
(Source: USGS)

What Is It Used For?

Although lithium is mainly known for its use in lithium ion batteries, it’s actually a pretty versatile metal with diverse use cases, which includes the following:

• 🔋 Batteries. The most important use case, lithium is used in rechargeable batteries in things like phones, laptops, and electric vehicles.
• 👓 Ceramics & Glass. Lithium oxide can be used as an additive to make all kinds of special glass products, like fiberglass.
• 💧 Lubricants. Lithium stearate is used to make lithium grease, which is used as a common, all-purpose lubricating grease.
• ✈️ Parts For Aircraft, Bicycle Frames, High-Speed Trains. Different metals (like aluminium) alloyed with lithium can be used to make parts for airplanes, bike frames and high-speed trains.
• 💨 Air Treatment. Different lithium compounds can be used in different air treatment applications.

— Lithium chloride is used in air conditioning and drying

— Lithium hydroxide and peroxide are used to purify and filter air

• 💊 Antidepressants. Lithium carbonate can be used as antidepressants.

Global end-use of lithium in 2021. Compare this to 2016 in the chart below. (Source: USGS)

Global end-use of lithium in 2016. Battery usage pretty much doubled in just 5 years.
(Source: USGS)

The Case Against Lithium

There are a number of risks involved when trading or investing in lithium. At the time this article was written, the lithium market is currently in a state of oversupply. This happened because of the 2016–2017 price spike, which led to an exponential increase in supply. On top of this, the lithium financial market is currently lacking transparency in an external pricing point in the futures market, which means prices are being negotiated privately and on a contract-by-contract basis.

The Case For Lithium

Lithium is still a commodity and can help diversify one’s portfolio. In the long term, there are a number of trends that suggests a positive outlook for lithium. Due to currently low lithium prices, lithium producers are cutting back on production. This could mean trouble for future supply, especially with rising demand. The concern is that due to this current cut back, the supply won’t be enough to meet future demand. We’re already seeing an uptick in spot lithium prices as part of the overall long-term trend towards mass electric vehicle adoption. Furthermore, adoption of other kinds of consumer tech that uses lithium-ion batteries are expected to increase as well. These include off-grid battery systems to store electricity and smart home devices like thermostats, alarms and smoke detectors.

Popular Ways To Invest In Lithium — Pros/Cons of Each

Unfortunately, there’s no easy way to directly invest in lithium. As a financial asset, lithium is not as mature as some of the other commodities. The main problem is that it doesn’t have an established futures market, which means there’s a lack of transparency in the pricing of lithium. That being said, the LME (London Metals Exchange) and its lithium committee are looking at options to launch the first ever lithium futures contract. In the meantime, here are some options that are currently available. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.

• Lithium ETF. There is currently one passive ETF that has a lithium theme. It aims to track and replicate an index, and invests in companies with business activities related to lithium. Fortunately, they’re traded on stock exchanges, so they’re pretty easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETFs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Just be aware that since the ETF invests in companies and not the actual metal, you won’t get complete exposure to lithium. Be sure to read the fine print & understand the risks and costs involved.
• Lithium Stocks. Similar to the ETF mentioned above, except that you can choose to invest in the companies yourself, without paying the expense ratio. There are a number of public companies that have varying levels of exposure to lithium, whether it’s their sole focus, or part of their overall portfolio. However, as mentioned, you aren’t directly following lithium prices since there are other factors at play, such as stock market sentiment, company performance, etc. As always, you may want to consider looking at the company’s annual reports (especially operational costs), portfolio of what other products & assets they have, what research & development they’re currently conducting, and potential exploration plans.

TL;DR — Is It The Right Investment For You?

As always, it depends on what your aims are. Lithium demand is expected to increasingly grow as mass adoption of EVs continue and as governments adopt a “greener” approach, subsidies, tax incentives, support schemes towards EVs all could help boost demand. However, we’re currently in a state of oversupply, due to producers responding to an earlier price spike. The main concern now is that this continued fall in production won’t be able to meet increasing demand in the future, which would certainly lead to a spike in prices. In addition, although you’re able to have some exposure to lithium via ETFs and lithium stocks, a lack of a futures market means there’s a lack of transparency in an external pricing point for the pricing of lithium, which currently means that prices are mainly being negotiated privately on a contract-by-contract basis.

🧺 If you are considering adding lithium to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your lithium position so you can take advantage of any volatility in the market.

💰 If you are considering adding lithium for speculation and profit, you may want to monitor the factors that affect lithium prices mentioned above. You may also want to keep track of the yearly USGS report, which summarises world production (minus the US), inventory levels, consumption, tariffs, an other bits of data. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on the lithium ETF’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can also swing unexpectedly, so be prepared and have an exit plan in place.

As always, if you are unsure, check in with a professional financial advisor before making any moves.

Thank you for reading! Let us know if you found this helpful. You can connect with us @VNewsletters, or check out our website for more information @ vaultcomms.com.