Investing in lithium: what you need to know
What are the challenges with investing in lithium, an increasingly vital resource?
As the world makes a concerted shift to cleaner sources of energy, with the production of electric vehicles ramping up in recent years, attention is turning to investing in lithium.
But there are challenges on the horizon. Throughout the 2020s, innovative solutions will be required to make eco-friendly batteries both cheaper and less powerful, all while eliminating the risk of a supply squeeze in any of the raw materials that go into a lithium-ion battery.
Figures show that lithium stocks have experienced momentum so far in 2021. Albemarle Corporation, one of the world's largest providers of lithium, saw its share price rise 163% in the 12 months to 1 September 2021, racing from $91 to $240. Over the same period, the Global X Lithium & Battery Tech ETF more than doubled in value, with a 115% increase to $84.
So… what are the upsides and downsides when it comes to investing in lithium stocks, and how is the market looking right now? Our snapshot will give you everything you need to know.
Investing in lithium: the facts
In a nutshell, the biggest hurdle associated with investing in lithium is this: while current mining capacity is enough to sate demand from the electric vehicle market, there are fears this situation will not last.
That's according to Rystad Energy, which warned in April that the sharp rise in EV production means a dramatic supply deficit will emerge within years. According to its analysis, lithium prices could triple by the end of this decade unless aggressive investment in new mines accelerates.
Rystad Energy argues that action needs to be taken now to build new lithium mining projects because it takes an average of five to seven years before they are operational.
If investment decisions are not taken as a matter of urgency, it believes this "could cause delays for the production of millions of electric passenger cars". Not only might this prompt consumers to find less eco-friendly alternatives because of the inconvenience, but it could cause countries around the world to miss the ambitious targets that have been established for cutting carbon emissions.
Rystad Energy's James Ley said: "A major disruption is brewing for electric vehicle manufacturers. Although there is plenty of lithium to mine in the ground, the existing and planned projects will not be enough to meet demand for the metal. If more mining projects are not added to the pipeline quickly, the energy transition of road transport may need to slow down."
Are there any alternatives to investing in lithium stock? Well, although there are a number of other battery technologies out there, Rystad Energy claims lithium "is far superior in EV applications and won't be substituted by anything else this decade".
When examining what are the best lithium stocks, it's also worth looking at things from an ethical perspective. According to Volkswagen, Chile and Argentina have the world's largest-known reserves of lithium, at 8 million tonnes and 2.7 million tonnes respectively. However, both countries have a marked difference in their mining methods.
While ore mining is relied upon for lithium extraction in Australia, South American countries tend to extract lithium by extracting saltwater from underground lakes, known as salars, and allowing it to evaporate.
Volkswagen said: "There are always critical reports on the extraction of lithium from salars. In some areas, locals complain about increasing droughts, which for example threatens livestock farming or leads to vegetation drying out. From the point of view of experts, it is still unclear to what extent the drought is actually related to lithium mining."
When assessing lithium stock, it is also worth remembering that other raw materials also play a crucial role in the creation of lithium-ion batteries (this technology is also relied upon for laptops and smartphones, the only difference is that the batteries for cars are much larger).
According to BloombergNEF, copper, aluminium, cobalt, nickel and manganese also commonly feature in these batteries, and there are concerns that nickel and manganese in particular could suffer severe shortages in the second half of the 2020s. Although enough of these materials have been mined, a backlog may mean they cannot be processed into specialist chemicals.
Those already investing in lithium will know that the cost of batteries has fallen sharply over the past decade. But Elon Musk, chief executive of the EV giant Tesla, believes prices need to drop even further if electric vehicles are going to be suitable for mass adoption.
During the company's Battery Day presentation in September 2020, Musk set out how technological enhancements could reduce their cost, on a kWh basis, by 56%. This could take the cheapest model in Tesla's range from the current price of $41,190 to $25,000. One year on, the question is this: if dire lithium price predictions come to fruition, would this affect ambitious plans to drive down costs?
You can gain exposure to the lithium market by investing in the stocks of the companies that manufacture it. Currency.com offers Albemarle Corporation shares in tokenised form, allowing you to gain exposure to its price without owning the underlying stock. This also gives you the opportunity to enter into short positions if you believe prices will fall.
Our website also offers the Global X Lithium & Battery Tech ETF.
Given how countries around the world have pledged to phase out diesel cars, automobile giants such as Ford are investing tens of billions of dollars in the production of electric vehicles, and lithium-ion is regarded by some as the best battery technology that is out there right now, there is a keen interest in lithium stock. However, analysts can be wrong in their predictions, and these stocks can be prone to volatility.
The top five companies include China's Jiangxi Ganfeng Lithium, Albemarle in the United States,, China's Tianqi Lithium, Chile's Sociedad Química y Minera, and Australia's Mineral Resources Limited.
According to CNN Business, the median forecast for ALB's stock price stands at $254, a 16.4% increase from current levels. The high-end projection is $300, a 37.5% increase, while the low-end estimate is $80, which would result in a 63.3% fall. Eleven analysts rate the stock a buy, one says it will outperform, 10 have a hold rating, one thinks it will underperform, and there is one sell rating in place.