Whether to invest in Co-Li metals: pitfalls of lithium and cobalt market

Demand for lithium is going to grow 40-fold, for cobalt and nickel — 20-fold

Today I would like to talk about the growing demand for lithium and cobalt, which are the main materials for electric batteries. It is logical to assume that in the light of the widespread use of electric vehicles of all stripes (from scooters to cars), the demand for these metals will raise their exchange price, as well as the quotes of mining companies. Let's see if this is the case and what is happening in the market in general.

With the development of various technologies, the nature of the demand for resources also changes: the demand for oil and gas is decreasing, lithium, cobalt, nickel and other metals are coming to the fore. Without these metals, modern batteries, on which all gadgets work, are impossible.

There are three types of batteries: nickel-metal hydride, lead-acid, and lithium-ion. The most reliable and promising at the moment is the latter option. Experts agree that the market for the main raw material for this battery — lithium — is extremely unbalanced and unstable for a number of reasons. More on that a bit later on.

According to the forecasts of the International Energy Agency (IEA), the demand for lithium will grow 40 times by 2040, for cobalt and nickel — 20 times. But the world's reserves are very limited, and investments in the development of mining of these metals in the current volumes are insufficient. As a result, according to all economic canons, an explosive increase in metal prices awais us. High prices will not help to reduce the unit costs of battery production — something that, in fact, the whole world is waiting for. Judge for yourself: replacing the battery on a Tesla car will cost half the cost of the car itself.

In two years, all the world's automakers will start selling their electric cars

There are 14 million tonnes of confirmed lithium reserves in the world, with an annual global production of 35-38 thousand tonnes. Approximately 40% of this volume goes to the production of batteries, 26% is used in the manufacture of ceramics and glass, 13% — for the production of lubricants, 7% goes to metallurgy, 4% — for the production of air conditioning systems, 3% are used in medicine and the production of polymers. Taking into account that the production of ceramics and glass will not grow by more than 6-8% a year, the main driver of demand for lithium will be the market of batteries for small (household electrical appliances, smartphones, laptops) and large mobile stationary platforms (so-called energy storage). Small platforms consume only 2% of the annual volume of lithium extracted, the main consumption goes to large platforms. This is due to the large-scale transition to renewable energy sources and electric transport. Large mobile platforms are electric cars, buses, and trucks. The automotive “traction” battery needs 50,000 times more lithium than a smartphone. A Tesla Model S needs 52,5 kg of lithium, while an iPhone — only 1 gram. A huge difference! But all world's automakers are going to start selling their electric cars by 2023. It is about 15 million new electric vehicles by 2025, which will require 98,000 tonnes of lithium. Now the annual output volume around the world is 35,000-38,000 tonnes. And this is only for cars.

The main consumer of lithium will be the so-called large stationary platforms. These high-capacity batteries are designed to store energy produced from renewable sources. One large battery of this type requires 1 tonne of lithium, one energy storage can contain up to 10,000 such batteries. With such consumption, we risk being left without lithium at all. According to experts, the technology that enables it to do without lithium will appear only in 10 years. At the same time, the price of lithium-ion batteries constantly falls: in 2018, the price was $195 per kilowatt battery, by 2025, the forecast is to decrease to $90. By 2025, the annual increase in lithium consumption for stationary platforms will be 40% , with up to 202,000 tonnes of metal used annually.

Problems of raw material extraction

A significant problem of the industry is the difficulty of mining. The development and start of exploitation of the field takes up to 5 years, since they are located in solonchaks, and it is necessary to conduct a lot of iterations, spend about $14 million to receive the final product. The ore mining method is much more expensive — the deposit costs $85 million. Experts estimate that by 2025 global production will grow to 320,000 tonnes. But given the length of development, investments in projects are needed already now, which is not happening in full. The reason was that until 2018 the prices for lithium and cobalt had been rising steadily from 2009, and there was an imbalance — supply exceeded demand, as a result, prices fell in 2019-2020. Manufacturers did not consider it necessary to invest in new projects after that.

Now the situation has changed, and the demand will long exceed the possible supply in the market. For example, the price of cobalt has increased by 69% over the past year, the price of lithium — by 127%. Unfortunately, these metals do not have liquid futures contracts on the exchange, and to invest in this segment, private investors will have to buy securities of mining and processing companies. Let's see what is interesting on the market and who is worth looking at.

The market leaders are the following companies: Albermale (Chile) — with a global market share of 18%, Ganfeng — with a share of 17%, SQM (Chile) — with a share of 14%, Tianqi — with a share of 12%, Livent — with a share of 5%. Other companies hold 34% of the total market share.

Chilean companies Albermale, SQM have the lowest cost of lithium production. And Livent company, in my opinion, is the most interesting in this segment, as its business is focused solely on the extraction and processing of lithium. Why are we talking only about lithium and not including cobalt producers? The answer is simple: more than half of the ore production of this metal occurs in the Congo (a very unstable region of the world), and more than half of the processed metal is produced in China. As a result, it is very difficult to find suitable issuers to invest in.

In the following materials, we are going to analyse the companies of the lithium market in more detail, select the most interesting issuer from the point of view of financial indicators and include its shares in our model portfolio. With this in mind, next commodities super cycle begins, it will be interesting to observe such a promising metal and its producers.