Investing in Lithium: Is lithium a good investment?

Once a quiet achiever, lithium over the past few years has hit the spotlight. Here’s a look into why lithium is currently the hottest commodity on the lips of entrepreneurs and business leaders everywhere.

Why is lithium in demand?

A report by Emergen Research projected that the global lithium mining market size, which was worth USD$3.33 billion in 2020, is expected to register a revenue compound annual growth rate (CAGR) of 6.8% by 2030. So, with that in mind, what exactly is lithium?

The lightest metal on the periodic table, lithium is a key component of the rechargeable lithium-ion batteries found in everything from smartphones to home storage batteries like the Tesla Powerwall. With a high charge capacity and long lifespan, the batteries are designed to support power-hungry devices. As Lithium-ion batteries are lightweight, this makes them well-suited to electric vehicles where power to weight ratios are critical. And while the world moves away from fossil fuels to power our vehicles and our homes, demand for lithium-ion batteries has skyrocketed.

As electric vehicles (EVs) hit the mainstream, demand for lithium continues to accelerate. Supply is also stretched by the fact that lithium also has a wide range of other uses, from stabilising glassware and ceramics to treating mental illnesses. Difficulty in obtaining lithium, particularly amid the supply chain disruptions caused by the COVID-19 pandemic, has been a major thorn in Tesla’s side, according to Tesla CEO Elon Musk.

Related article: How to invest in Lithium Battery Companies

Why is Lithium in short supply?

The problem is not a shortage of lithium ore, as lithium itself is a common element. Most of the world’s lithium comes from South America and Australia. The vast majority of Australia’s lithium is found in Western Australia, on a site known as Greenbushes which produces 1.95 million tonnes every year.

As the world weans itself off coal and oil in favour of renewable energy, lithium offers Australia the opportunity to get in on the ground floor of the clean energy revolution.

The challenge is that lithium ore requires a lot of refinement before it can be used in a battery cell. Right now, the mining and refining of lithium appears to be the key limiting factor to “accelerating the advent of a sustainable energy future,” Musk told analysts during a recent Tesla earnings call.

“I encourage entrepreneurs out there who are looking for opportunities to get into the lithium business,” he said. “Do you like minting money? Well, the lithium business is for you.”

Where does Lithium come from?

Due to a lack of investment in the 2010s, the world’s lithium supply is still playing catch-up, with increasing demand likely to drive the price of lithium and EVs higher.

The problem is that it takes up to seven years to establish a lithium mining operation from the ground up. While production in Australia and Argentina is increasing, it is still not enough to meet demand. As demand continues to outweigh supply, investors should expect prices to continue on their upward trajectory and stay elevated.

According to Benchmark Minerals, there are only seven lithium-ion battery manufacturers in the world which can supply OEMs and EV producers. EV batteries account for 70% of global lithium demand, with the average battery price now around USD$9,000 –more than 20% of the cost of the vehicle.

Global EV sales doubled in the last year, led by China and Europe. This is expected to accelerate as governments around the world tighten emission standards. The risk is that soaring lithium and battery prices could stall this growth, particularly in the US where adoption is lagging.

Musk has signalled that Tesla may need to actually mine lithium itself to secure its supply chain and manage soaring costs. This is easier said than done, but it reflects the strong concern that unchecked battery price rises will slow the transition to electric vehicles.

Related article: How to buy Tesla shares in Australia

How can you invest in Lithium?

Unlike precious metals such as gold, investors can’t directly buy and sell lithium as an asset. There are no tradable contracts on public markets. Instead, investors can gain exposure via lithium mining stocks, chemical manufacturers and battery manufacturers.

Top lithium stocks include South America’s Albemarle (NYSE:ALB) and Sociedad Química y Minera de Chile (NYSE:SQM), along with North America’s Lithium Americas Corporation (NYSE:LAC), and Livent Corporation (NYSE:LTHM). Closer to home, lithium stocks on the ASX include Pilbara Minerals (ASX:PLS), Sayona Mining (ASX:SYA) and Core Lithium (ASX:CXO).

One of the most popular ETFs providing exposure to lithium is the Lithium & Battery Tech ETF (NYSEArca:LIT). It invests in the full lithium cycle, from mining and refining the metal, right through to battery production. eToro also recently launched a Smart Portfolio called ‘BatteryTech’, which provides retail investors exposure to an ever-growing industry.

So, is lithium a good investment?

Before investing in lithium stocks or any other stocks for the matter, you should conduct thorough research and ensure the product aligns with your investment goals, timeframe and tolerance for risk. Also, bear in mind, that past performance doesn’t not indicate future performance. If ever in doubt, speak to a professional financial advisor.

Cover image source: Black_Kira (Shutterstock.com)