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Fear and Lithium in Las Vegas? Bet on the Lithium: Liam Denning

These translations are done via Google Translate

June 29, 2018, by Liam Denning

(Bloomberg Opinion)

As locations go for a conference about lithium, Las Vegas is hard to beat. Aside from the obvious, there’s just something apt about this desert cauldron of greed and fear hosting an industry finely balanced between both.

This week’s conference, the 10th hosted by Industrial Minerals, was, by all accounts, the best-attended ever, with a notably strong contingent of finance types. Lithium has been on a quiet tear, as some of that Muskian aura around electric vehicles has lit up prospects for the metal embedded in the batteries. Since I wrote this column in early 2016, prices have roughly doubled:

Investors noticed. The Global X Lithium & Battery Tech ETF, valued at less than $50 million in early 2016, has received more than $900 million of net inflows since, according to data compiled by Bloomberg.

With such windfalls often comes a dose of anxiety, however. Look back at that chart of lithium prices and you’ll notice the slight dip toward the right. Coupled with a bearish analyst report Morgan Stanley published in February – widely referenced in Vegas, if seldom praised – it teed up what brokers refer to as a breather:

This leaves the industry in a curious position.

On one hand, the opportunity is undeniable. For reasons encompassing cost, environmental benefits and energy security, electric vehicles will eat into the car market over time, especially in Asia. The exact gradient of growth is debatable, but it slopes up and to the right. Benchmark Minerals Intelligence, a research and data firm, projects demand to rise from about 220,000 tonnes of lithium-carbonate equivalent last year to more than 900,000 in 2025 and around 2 million by the early 2030s.

But the route is fraught with doubt. At first glance, developing the lithium required doesn’t look that demanding. Tom Schneberger, FMC Lithium’s COO, said this week perhaps $15 billion of investment was needed to boost supply over the next seven years or so. That’s less than what one oil major spends in a year. When lithium’s top three producers have a collective market cap of only $31 billion or so, though, it’s a heavy lift, especially given the metal’s peculiarities.

For starters, it can only loosely be called a commodity. Lithium comes in different compounds, and the battery-grade stuff, especially, must be exceptionally pure and tailored to manufacturers’ specifications. So unlike, say, aluminum, lithium isn’t homogenous (it’s like iron ore in this respect, only more so). That complication, along with it being a relatively small market dominated by a few suppliers and customers, makes it tough to talk about a lithium “price” (Benchmark Minerals tracks 11 of them). That makes it tough to hedge and, therefore, secure financing for new projects.

Compounding this are myriad other uncertainties. On the supply side, there is fear that South America’s majors such as Sociedad Quimica y Minera de Chile SA, or SQM, will swamp the market (the Morgan Stanley thesis, essentially). They control the cheapest lithium resources, with a cash cost of maybe $5,000 to $8,000 a tonne.

As for demand, multiple battery technologies, each using different combinations of metals, compete; and there are more exotic innovations such as solid-state batteries coming. Then there’s the potential size of the market to consider. That depends not only on how many electric vehicles get sold, but also what kind, a point emphasized to me this week by Jon Hykawy, president of Stormcrow Capital. Many Asian buyers, in particular, won’t necessarily want high-power, high-capacity models such as Tesla Inc.’s.

Using very basic assumptions, selling 10 million electric vehicles with an average battery size of 50 kilowatt-hours and 0.9kg of lithium per kWh adds up to 450,000 tonnes of demand in 2025. Tweak the number of vehicles and battery size down by 10 percent each, though, and that drops by 19 percent, or 86,000 tonnes – more than the current production of Albemarle Corp., one of today’s top three producers.

This uncertainty is why the wobble in prices hit the junior companies harder. The Vegas conference reminded me in some ways of oil conferences from five years ago, with the boom paying for many a stall manned by some small fracker you had never heard of. Intuitively, you know many of these companies will not exist in five years and that the downward bit of the cycle looms as supply ramps up.

And yet, outright despair isn’t warranted. Paradoxically, some excess capacity and lower prices aren’t bugs, but features of what comes next. Think about what happened with solar power; it took a cycle of giddiness, political support and massive expansion to push prices down to where the technology went from hippy fringe to cost-effective mainstream.

Similarly, lithium’s fortunes rest almost entirely on electric vehicles taking hold. That rests, in turn, on persuading all the other linkages in that chain – chemical processors, cathode manufacturers, carmakers, politicians – that supply will be reliable, high-quality, and affordable. Nobody wants a repeat of what’s happened with another battery ingredient, cobalt.

If that paradox makes it tough to secure financing, it doesn’t make it impossible. The very fact that a lot of vaunted projects won’t happen, along with inevitable delays for many that proceed, should cap fears of excess supply. Success for junior companies will require credible management with a successful track record, in an industry where such things are by definition scarce, along with creativity on money-raising. Names that spring to mind include James Calaway, chairman of Global Geoscience Ltd. and former chairman of established producer Orocobre Ltd., and Nemaska Lithium Inc., which recently pulled together a 1.1 billion-Canadian-dollars smorgasbord of funding, encompassing bonds, forward sales of lithium and, most notably, an equity investment by Softbank Group Corp.

Ultimately, much of the money over the next five years or so will have to come from downstream buyers seeking to secure supply. Chinese processors of lithium ores have been doing this aggressively already (another thing that seems to provoke greed and fear in equal measure right now).

But the automotive sector, especially, will have to step up. For those that have committed to an electrified strategy, security of lithium supply is critical – without it, those new cars simply won’t be built. In that context, whether lithium costs $10,000 or $20,000 a tonne in the early 2020s isn’t irrelevant, but is less important.

Lithium’s losing streak may well carry on through the rest of 2018 (Chinese pricing post the introduction of new electric-vehicle incentives will be the indicator to watch). For those with a longer view, the odds are still stacked heavily in its favor.

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