Lithium Demand Will SpikeThe Energy Report, Desormeaux highlights growth areas in the industry and explains why small-cap lithium producers will have room to compete with the big boys.
Companies Mentioned: FMC Lithium Corp. - Galaxy Resources Ltd. - Lithium One Inc. - Rockwood Holdings Inc. - Sociedad Química y Minera de Chile S.A.
The Energy Report: The fourth annual Lithium Supply & Markets Conference in Argentina took place at the end of January. What was the mood at that time?
Daniela Desormeaux: At that time, people were thinking about how the situation in Europe would impact the industry. I think we have more information about that now, but in January we did not. Regardless, the main drivers behind lithium demand are relatively independent of the economic cycle, and what we see is demand continuing to grow at a healthy rate despite the current situation in Europe. People in the industry know that the main driver of lithium demand is batteries. In the short-term, the economic cycle obviously affects the lithium industry, but from a long-term view I think expectations remain optimistic.
TER: We saw some lithium price increases in mid-June of 2011 when FMC Lithium Corp. (FMC:NYSE) and Chemetall (a unit of Rockwood Holdings Inc. [ROC:NYSE]) said that they were raising prices on both lithium hydroxide (LiOH) and lithium carbonate (Li2Co3). Will prices continue stronger, or will they stabilize?
DD: Well, lithium pricing is very interesting to follow because it's not just about the balance between demand and supply; it's determined by what the main lower-cost producers decide to do with prices, which then impacts the rest of the industry. That's the pattern we have seen in the past. FMC and Chemetall did raise prices, and I think they had two reasons for doing that. One is that producers are facing higher raw material costs. The other thing is that FMC and Chemetall are both making some investments in the U.S., and FMC is making investments in Argentina. They need higher prices to justify financing these investments.
Also, it's important to distinguish between nominal prices and real prices, inflation being another source of price pressure. But short-term prices may be stronger because of inflation and these new investments. prices should remain stable in the mid- to long-term because even as demand is growing, new production is coming into the market. This will help balance the market.
TER: When it comes to pricing individual lithium products, are grade and purity the most important factors?
DD: Yes, battery-grade lithium requires a small particle size, and to reduce particle size producers need more processing and energy. That increases costs. Therefore, battery-grade lithium carbonate is more expensive than commercial-grade lithium carbonate. Buyers have to pay for more purity.
TER: A recent article in Bloomberg Businessweek, "IPad Boom Straubs Lithium Supplies After Prices Triple," was a very positive story, and it moved the market on small-cap lithium stocks. Is this a sign that the lithium market is beginning to wake up?
DD: I think the industry has already awakened. We have seen a lot of global interest in lithium over the last five years. But my fear is that in some cases there is an overestimation of lithium demand. Lithium is going to be important now and more important in the future because of its use in batteries for electric cars among other things, but it won't replace oil.
TER: Could these overly robust demand expectation lead to a supply glut?
DD: In the past, the industry has overestimated demand, and that's why we saw something like 90 projects in the works at one point. But it's impossible for all of these projects to be part of the lithium supply because there is not enough demand in this space for everyone. Thus, most of these projects did not reach production.
TER: Nonetheless, demand is actually growing. The question is, at what pace?
DD: The lithium industry has a very promising future, and we think demand will grow at about 8% per year. But it's also important to have a very realistic perspective about the industry.
TER: Daniela, aren't component makers in transition now from nickel-metal hydride batteries to lithium-ion batteries? How significant is this shift?
DD: The replacement in the electronic-devices segment is largely already done. That happened in the nineties when Sony Corporation (SNE:NYSE) introduced the first lithium-ion cell. It took less than 10 years for lithium-ion batteries to take 90% of the market. But there is some new demand as well: because of environmental issues, China is prohibiting the use of acid batteries in motor scooters or bikes, so light electric vehicle makers are being forced to change from acid batteries to lithium-ion batteries.
TER: Are we back to pre-recession demand levels for lithium?
DD: I think this industry is really very interesting in that regard. Despite the recession, some expect the battery industry to grow 20% this year. By the end of the year I think that total demand will be higher than previous levels.
TER: Where are we now on the demand curve for lithium? At the foot? Near the peak?
DD: We are getting close to a breaking point. This will occur when electric cars become affordable for many consumers. We have seen this happen in some countries where there have been lots of subsidies, but it's difficult to believe that European governments will continue with these subsidies, given economic conditions. But the numbers could be amazing. For example, the iPhone contains something like 5 grams (5g) of lithium carbonate while a battery for a car can have 30 kilos (30kg) of lithium carbonate in it. The difference in the numbers is huge. I do think we are approaching a change in the growth trend—a breaking point.
TER: When will we hit that inflection point?
DD: That's a very good question. I think it will be after 2015. The situation in Europe will impact the uptake of electric cars. There are also some analysts who believe that China is slowing down as well. We'll have three or four years before we see a massive taking off of the lithium-ion battery industry. It may be sooner or later depending on the economic situation, of course, but I think we are approaching it.
TER: Can small-cap lithium companies compete with the large companies on scale and margin?
DD: I think the answer is yes, because so far what we have seen is the big three lower-cost producers (Chemetall, FMC and Sociedad Química y Minera de Chile S.A. [SQM:NYSE; SQM-B:SSX; SQM-A:SSX]) are giving the space for newcomers to enter the market. Years ago, I did not think they would do that. I thought they would lower prices to where most of these new projects couldn't be profitable. For example, if the big three lowered prices to, say, $2,000 per metric ton ($2,000/mt), most of these new projects wouldn't be profitable. But they haven't done that. That's a signal that they are giving room to these newcomers to enter into the market because the demand is growing and the supply, so far, has not grown at the same rate. Smallcaps will have a chance, but of course they will have to compete against each other because room for new companies is limited. If too many come into the market, prices will start to go down, and that of course will impact those smaller companies. Ultimately, I think that the market will be balanced and the lowest-cost new producers will be part of the supply chain.
TER: Lithium equities' performance has been very weak over the past 16 months, even with this recent uptick in lithium prices. With the exception of the Galaxy Resources Ltd. (GXY:ASX) and Lithium One Inc. (LI:TSX.V) merger that is happening now, why aren't we seeing more consolidation?
DD: This global economic situation has had an effect on almost all publicly listed companies. The lithium industry is especially sensitive to that. On the other hand, the economic situation is very much related to what has happened with oil prices, and the oil price is very important to the uptake of electric cars. It is very important to know how the industry works and what the main forces are. We see the main trends in the lithium industry pointing to a very promising future. For example, we have seen many new large-scale energy storage projects that use huge batteries. This will represent an important source of demand, as will electric bikes in China.
TER: You have recently said that demand for lithium hydroxide would grow from 20% of lithium commodity consumption to 30–35% of lithium consumption by 2020. How can investors play this growth in lithium hydroxide demand?
DD: That's a very interesting question because the market for lithium hydroxide is mainly for lubricating grease. New batteries are being developed, the lithium-ion phosphate battery, for example, that use lithium hydroxide instead of lithium carbonate. So, we expect a higher growth rate for lithium hydroxide than for lithium carbonate in the case of batteries. And this is very interesting for the companies that plan to produce lithium chemicals from spodumene (pegmatites), because the process of producing lithium hydroxide or lithium carbonate from lithium concentrate (obtained from spodumene) is very similar in terms of costs. Chinese lithium chemical producers can either produce carbonate or hydroxide directly from the concentrate. This gives them an advantage over brine producers because SQM, Chemetall and FMC have to produce the lithium hydroxide starting from the lithium carbonate.
TER: My understanding is that lithium hydroxide is the choice of some manufacturers, including Chinese battery and car manufacturer BYD Company Ltd. (BYDDF:OTCBB), of which Warren Buffett owns approximately 10%.
DD: That's correct. BYD is working on the lithium-ion phosphate battery, which uses lithium hydroxide in the cathode, and I think this company will be a very important player in the future. Its K9 electric bus is being tested in many cities and if successful it will represent an important step towards the electrification of transportation.
TER: Daniela, what do you tell investors who want to invest in lithium?
DD: You have to look at the battery industry, because it is going to be crucial. Today it represents 30% of total lithium demand and we estimate that in 10 more years, it will represent about 50% of the demand. So far, there aren't any substitutes for lithium in batteries. But who knows what will happen in the future. In any event, the lithium industry shows a very promising future, and among all of the commodities it represents one of the highest expected rates of growth.
TER: Thank you, Daniela.
DD: Thank you. I enjoyed it.
Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. Prior to starting with signumBox, she was strategic marketing manager at SQM, where she was responsible for market intelligence on lithium, iodine and other industrial chemicals.
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DISCLOSURE: 1) George S. Mack of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
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September 22nd, 2021
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