White Gold: Will Lithium Stocks’ Gamble Pay Off?

  • Jan 09, 2019 AEDT
  • Team Kalkine
White Gold: Will Lithium Stocks’ Gamble Pay Off?

Over the past 2-3 years, Lithium has emerged as a key investment theme for some market players. The investors are keeping a close watch on the performance of this next to precious, white metal in the commodity market and the Lithium linked stocks. The underlying reasoning on the metal gaining a high status in the recent past is the growth of lithium demand, driven by the anticipation of growth in the battery-driven cars (electric cars). The metal is one of the prime ingredients for the battery makers.

Lithium plays an important role in storing electricity however the rechargeable batteries used in electric cars and gadgets also require other metals such as graphite, nickel, manganese, and cobalt. The mix depends on the type of battery the makers want to produce.

Cobalt also plays a role in battery production and is rare, expensive, and the war-torn Democratic Republic of Congo currently dominates supply for the same. With the scarcity of supply currently, cobalt could be a deciding factor which derails the expected boom in electric cars, especially as China, has moved quickly to stitch up supply. This has resulted in pushing European, Japanese and US carmakers out of the market to some extent, and the battery related commodity prices have increased manifold times over the years (although comparatively down within last one year).

Issues like range anxiety and others must be fixed to fight a slowdown in demand in the electric car revolution and a corresponding drop in lithium demand as a cascading effect. Moreover, there are other concerns such as the type and grade of lithium to buy.

Lithium quality is a significant factor, mainly because battery makers are demanding higher specifications every year because the better lithium quality has the more storage capacity for electricity. However, these issues have not yet dampened the demand but supply issues etc have impacted some Australian lithium companies like Orocobre, Pilbara Minerals, Mineral Resources, Altura Mining, Galaxy Resources etc.

However, over the next few years, major carmakers in the world are planning to roll out new battery-powered models, which can increase the demand for lithium stocks as the manufacturers might compete for gaining market shares. However, the long-term pain of new supply continues to be a cause of worry like the iron-ore market in Australia a decade back.

Lithium was earlier thought to be a sector which is mostly driven by fundamental supply and demand but impacted less by sentiments. This view was backed up by the series of deals struck by players like Pilbara Minerals with Asian customers and investors. However, these days sentiments are also driving the scenario.

Although, a robust global market fundamental for Lithium carbonate products still persists, and a constant price rise is expected over long term, the medium term and near-term projections are shaky. Some reports unveil lithium prices to be down to a level below US $10k per tonne of lithium carbonate in medium term before it surges back to over US $20k per tonne in long run. But again, the uncertainty prevails. Orocobre at the 2018 year end, touched upon the softness in price scenario; and this did not go well with many investors across the sector. Nevertheless, the players in the sector are trying to withstand headwinds and increasing inventory or focusing on innovation and diversification to be on the edge. However, investors must remain aware of multifaced challenges including the quality of lithium extracts. Then, impurities in raw material can cause severe discounting of price in the same way iron ore is discounted if it contains too much impurity. So, the key does not hold much at the mining level as it is at the processing level, which is why there is a push by miners to get involved in processing to meet battery-maker demands.

It can be said that although Lithium may be the investor's preference, in the coming few years, however, they must also carefully consider the risks associated with this precious metal and be wise in terms of selecting fundamentally strong lithium stocks. Just with fluctuating scenario, key lithium stocks like Galaxy Resources surged up as on January 09, 2019.


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