By Carmel Fisher, Director
04 August, 2017
Because I subscribe to investment newsletters, my inbox is bombarded with investing tips and ads for the next big thing.
One such email — with the headline Power Up Your Profits — told a compelling story about the enormous demand for lithium as a result of the rapidly expanding electric vehicle industry.
Most tip sheets use a bold font, quote big percentage movements and make sensational claims to entice investors to their promoted stock. This email used all of these tools; but while the claims were sensational, they appear to be true.
The lithium ion battery has been around for decades but the worldwide shift towards smart phones, electric bicycles, cars and household solar storage is driving up demand.
Interest in lithium — and lithium stocks in particular — has been growing ever since electric vehicle manufacturer Tesla highlighted the need for a massive battery-producing infrastructure.
In March 2016 Tesla's CEO Elon Musk said: "In order to produce half a million cars a year, we would basically need to absorb the entire world's lithium-ion production."
Tesla is not the only driver of the demand surge for this new 'white gold'. China has a rapidly expanding battery industry, with this year's manufacturing capacity expected to be four times what it was in 2015. Australian lithium exports have tripled over the past 18 months; all soaked up by increased demand from China.
According to investment bank Credit Suisse, demand for lithium could outstrip supply in 2020 by 25 per cent. At that point the world is expected to need over 380,000 tons of lithium, which is double the demand in 2014.
A recent Goldman Sachs report suggested the market for electric vehicles will grow more than 11 times by 2025, with annual demand for lithium potentially reaching 470,000 tons by 2025. Goldman Sachs claims every one per cent increase in the market share of battery electric vehicles will require five new lithium mines to be built.
With these sorts of projections it is easy to see the beginnings of a bull market, driven by tight supply and surging demand, underpinned by a long-term growth industry.
What is lithium, and will it indeed be the "new gasoline", as suggested by Goldman Sachs?
Lithium is the lightest element on the periodic table that can conduct electricity. According to scientists lithium is rare – making up 0.00007 of the earth's crust – but it's not exceptionally rare. The US Geological Survey says the earth contains a 365-year supply of lithium at the current rate of production (roughly 37,000 tons a year).
However, although lithium mines exist and a number of companies are exploring innovative ways to bring more lithium to the market, it is an underdeveloped industry with only five mines developed globally in the past two decades.
It takes some time for lithium production to ramp up, hence the current situation where demand is outstripping supply.
So, is lithium a speculative commodity that will suffer the ups and downs of all commodities? Yes.
Should we be worried that investors have become a bit frenzied about lithium stocks? Probably.
Should we heed tip sheets and follow a few big money names on board this investment train? Only if we have funds we can afford to lose and only after we've done our research and understand what we're doing.
Is the lithium story one of the more interesting investment tips to arrive in my inbox of late? Yes, but it might just sound good because the others are so rubbish.
I will watch with interest nevertheless.
*Carmel Fisher emphasises that the views expressed are her own and do not constitute investment advice nor a recommendation to invest.