Column: What price lithium, the metal of the future? Andy Home

Pure Energy Minerals

06/06/2016 13:05

(The opinions expressed here are those of the author, a 
columnist for Reuters) 
    *  
 
    By Andy Home 
    LONDON, June 6 (Reuters) - Lithium is shaping up to be The 
Next Big Thing. 
    Prices are going stratospheric, junior miners are rushing to 
stake claims on future supply and investment websites are 
glowing red hot with speculation about the metal's prospects.  
    The Global X lithium fund  LIT , one of the very few ways to 
get in on the action  urn:newsml:reuters.com:*:nL3N189152, has gained 25 percent over 
the past three months with assets under management leaping from 
$41 million to $68 million since the start of the year.  
    It's a far cry from the 1990s, when the U.S. Department of 
Energy was selling surplus stocks and mines were closing as the 
nuclear arms race wound down, reducing demand for one of the 
materials used in hydrogen bombs.  
    But the fortunes of this most versatile of metals were 
transformed in 1991 when Sony commercialised the lithium-ion 
battery, now an integral part of just about every electronic 
device.  
    Now, however, it looks set to scale even greater heights as 
carmakers, led by Tesla  TSLA.O , step up efforts to mass 
produce electric vehicles using an enhanced version of that same 
technology.  
    Lithium could become the key material in the coming green 
revolution of storable energy. 
    But the lightest of metals in the periodic table is shrouded 
in darkness when it comes to its pricing mechanics.  
    If lithium is going to become an integral part of the global 
energy supply chain, its market opacity is a big problem.  
     
    WHAT'S THE PRICE?  
    Start with the most basic of questions. What is the price of 
lithium?  
    More than $20,000 a tonne on the Chinese spot market for 
battery grade material, according to research house CRU.  
    It's about $7,000 for Chinese imports of carbonate -- the 
most traded form of the metal -- but only $5,000 for U.S. 
imports, analysts at Macquarie Bank said.  
    Whichever measure you use, prices are on the up. CRU 
estimates that the Chinese spot price has almost tripled from 
$7,000 the middle of last year. Macquarie, meanwhile, notes that 
Chinese import prices for Chinese carbonate and export prices 
for hydroxide have hit record highs.  
    It's a bit confusing, isn't it?  
    There are two problems here. The first is the bewildering 
number of products that can be made from lithium, ranging from 
lithium stearate (industrial grease) to lithium fluoride 
(aluminium smelting) to butyllithium (organic compounds).  
    All are normally converted for pricing into lithium 
carbonate, largely used for battery manufacture.  
    But even then the picture is complex.  
    There are different types of carbonate, with lower-grade 
material for the ceramics and glass industries, for instance, 
while higher-grade material used in batteries. Nor are 
lithium-ion batteries themselves homogenous. There are five 
major types, each using a different lithium compound.  
    Things become even murkier because the second problem with 
lithium pricing is that most trade is conducted between a small 
number of producers and their customers.  
    There is no exchange trading, no terminal storage market and 
only an extremely limited spot market.  
    This means that price assessments such as those from CRU and 
Macquarie rely first and foremost on published trade volumes and 
trade values, a statistical sleuthing exercise made more 
difficult by the complexity of the lithium product chain.  
    The (highly variable) bottom line is that lithium pricing is 
extraordinarily opaque.  
     
    OLIGOPOLY 
    That opacity is a direct result of the way the lithium 
market is structured. Only four producers control about 85 
percent of supply, Macquarie says.  
    Chile's SQM and U.S. companies FMC Corp  FMC.N  and 
Albemarle Corp  ALB.N  dominate the production landscape, 
extracting lithium from salt lakes in Chile and Argentina. 
Albemarle also operates a brine operation in Nevada.  
    The fourth producer is Australia's Talison, which produces 
lithium at the Greenbushes mine in Western Australia. But it is 
hardly an independent, being 49 percent-owned by Albemarle and 
51 percent by China's Tianqi Lithium  002466.SZ , which takes 
almost all of the mine's output for processing in China.  
    This oligopoly poses a real challenge for Tesla, will need 
about 27,000 tonnes of lithium carbonate a year to reach its 
sales target of 500,000 vehicles a year by the end of 2018. That 
equates to 16 percent of global consumption last year, Macquarie 
estimates.  urn:newsml:reuters.com:*:nL3N1813YJ  
    Tesla seems to be placing its faith in a new generation of 
producers, signing prospective off-take agreements with Bacanora 
Minerals  BCN.V , owner of the Sonora project in Mexico, and 
with Pure Energy Minerals  PE.V , which is working on the 
Clayton Valley project in Nevada.  
    Interestingly, in announcing these deals, both miners said 
that material would be supplied at a predetermined level below 
current market pricing in alignment with Tesla's goal to reduce 
the cost of its batteries. 
     
    FUTURE UNCERTAIN 
    There is no shortage of other companies staking their claims 
to profit from the expected lithium rush.  
    But does the world actually need more lithium?  
    It seems obvious that it will, given the limited number of 
suppliers and the forecast rise of the electric car.  
    That's why prices are so strong, isn't it?  
    Well, not necessarily. 
    Macquarie Bank argues that one of the reasons the price is 
so strong is because the oligopoly is running well below 
capacity.  
    Hard production figures are difficult to come by since none 
of the major operators publishes them.  
    But based on Australian exports of lithium concentrate, 
Macquarie suggests that Talison was last year operating its 
Greenbushes mine at only 60 percent of capacity.  
    "We believe existing producers will be forced to lift 
volumes to protect market share and keep new entrants out," the 
bank said in a report last week, adding that it expects prices 
to peak in late-2017 and then start heading lower. 
    It's a sobering assessment for a metal that is creating such 
a buzz in the blogosphere.  
    There is an obvious analogy with the rare earths mania of a 
few years ago, when excitement about the demand outlook for 
esoteric metals such as neodymium boosted prices only for 
investor exuberance to be dashed by a realisation that there was 
more than ample supply to feed that demand. 
    Might lithium go the same way?  
    Should we be worried by a future supply squeeze or is supply 
already being squeezed by dominant producers?  
    Lithium's market dynamics are so dark it is almost 
impossible to say with any degree of uncertainty.  
    That's a problem for investors.  
    It's also a big problem for the likes of Tesla, who will be 
at the mercy of those market mechanics, at least until some 
bright spark invents a new type of battery.  
 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
COLUMN-Lithium - the commodity winner you can't buy: Russell    
 urn:newsml:reuters.com:*:nL3N189152 
Tesla puts pedal to the metal, 500,000 cars planned in 2018    
 urn:newsml:reuters.com:*:nL3N1813YJ 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
 (Editing by David Goodman) 
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter 
https://twitter.com/AndyHomeMetals)) 
 
Keywords: LITHIUM BATTERIES/AHOME