Is This Commodity the “New Gasoline”?

As an investor, every once in a while, you read something that really catches your attention.

I had that happen recently, and it involves the growth potential for what Goldman Sachs called the “new gasoline.”

Today I want to take make sure this commodity is on your radar – it could provide HUGE upside potential as the story unfolds. Let’s have a look…

I’m talking about lithium. The impressive metal that powers everything from iPhones to luxury cars.

Consider these numbers:

  • The battery of a normal cellphone uses approximately 5–7 grams of lithium carbonate
  • Meanwhile, a battery-powered (70kWh) electric car from Tesla (Model S) uses 63 kilograms of lithium carbonate.

The electric car clearly uses a lot more lithium carbonate, but we need some context on this. Here it is… it would take 10,000 cellphones to equal the lithium carbonate required by a single Tesla Model S.

At this point, you are probably thinking what I was thinking. If the electric car really starts gaining some traction, then the demand for lithium is going to go ballistic.

Here’s the case for lithium…

Lithium — There Is Lots of It, but It Isn’t All the Same

First up, lithium is a very unique metal.

It is so soft that it can be sliced with a kitchen knife and is so light that it floats on water. It remains solid at a wide range of temperatures, having a high boiling point as well as one of the lowest melting points of all metals.

It is the lightest solid element on Earth, with twice the density of the next best alternative.

In the 1940s, doctors began prescribing it to treat “mania,” which is now more appropriately called bipolar disorder. It also is used as part of the production of ceramics, lubricants, heat-resistant glass and several other commercial applications.

In recent years, we know lithium as being a key component in batteries for cellphones, laptops, tablets and now electric vehicles.

Lithium is not rare, but the economics of extracting it differ greatly depending on its concentration and form.

We can find lithium mainly in two forms. Liquid solutions called brines (salt lakes) and in hard igneous rocks that require traditional mining.

With current technologies and prices, the truly profitable source of lithium is through evaporating highly concentrated brine.

We can actually get the lithium out of the rocks faster, but it costs considerably more to do so.

Chile, Argentina and the United States are the largest producers of lithium. However, Bolivia has the largest reserve base. The most highly desirable brine deposits are almost all found in South America.

If lithium becomes the “new gasoline”, South America would become the new Middle East and the U.S. would again be dependent on foreign countries for transportation energy.

All of the best South American reserves are all locked down by established producers.

Eighty-six percent of lithium production comes from four main players:

  • 13% from FMC Corp.
  • 22% from Chemical & Mining Co. of Chile
  • 20% from Albemarle Corp.
  • 31% from China’s Tianqi Group.

Another 13% of production comes from various Chinese companies. That leaves all of 1% for everyone else. I believe we would call the lithium market an oligopoly.

Tesla Is Going to Need a Lot of Lithium — So Will Others

Painting a bullish picture for lithium around the demand required for electric car batteries is not difficult. Technological breakthroughs, favorable policy initiatives and supportive public opinion seem to be setting electric vehicles up for a sustained run of growth.

With 70 million cars being sold globally every year, this is a huge market.

Goldman Sachs estimates that just a 1% increase in the penetration rate of electric cars would cause total global lithium demand to increase by 50%. Remember, just one Tesla Model S requires the same amount of lithium in its battery as 12,000 cellphones.

A 1% increase in electric vehicle penetration does not seem like a particularly aggressive assumption. What will really determine the impact of this on the lithium market is how fast that 1% increase in penetration occurs.

Imagine a 50% increase in demand for lithium happening in one year… there is no way that supply could keep up.

The electric car battery manufacturers would be lining up for lithium just like we were lining up for gasoline in the 1970s.

Goldman ran a few numbers assuming that electric vehicle sales would amount to 22% of all vehicle sales in 2025, up from less than 3% today. What they concluded was that electric vehicle demand by itself at that level could triple the amount of lithium required annually from 160,000mt today to 470,000mt by 2025:

Electric vehicles powered by lithium-ion batteries will become an increasing portion of the transportation mix over the next decade.

The gradual acceptance of electric cars seems likely to be a game changer for lithium demand. But it isn’t the only source of lithium demand growth.

Demand from consumer electronics and devices is continuing to grow. Each year, a larger percentage of the world’s population will get a mobile device, and as the devices evolve, they keep requiring higher-capacity batteries. The consensus opinion I’ve found is that consumer device demand lithium will continue to grow at 8–10% annually.

Another potential major step change in demand could come from renewable energy in the form of grid storage.

One of the major limitations of solar and wind power is that they are intermittent. That means that as we capture this energy, we need to be able to store it in order to make it a reliable power source. Lithium batteries could be front and center in the build-out of grid storage capability. Albemarle believes that lithium demand from grid storage could grow more than 30% per year through 2024.

Over the past year the price for lithium carbonate is really heating up.

With more electronics and automobiles requiring a small power source with long battery life, lithium has a long runway ahead of it.

Keep an eye on lithium – and the four big producers named above. If it does turn out to be the “new gasoline,” there will be plenty of ways to play it in the next few years.

Keep looking through the windshield,

Jody Chudley

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