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Investors need to look down to ride the lithium boom

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam1/27/2022 05:36 PM GMT+08  • 4 min read
Investors need to look down to ride the lithium boom
The best way to play lithium may be through listed companies such as SQM and the Global X Lithium ETF
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Don’t Look Up is a record-breaking movie that may inspire investors. It has been watched for 330 million hours, making it the most popular movie in Netflix history. It could also signal record gains in lithium prices.

The plot centres around a scientist portrayed by Leonardo DiCaprio. He has discovered that a comet is about to wipe out humanity. The scientist begs the US President (played by Meryl Streep) to divert the comet using nuclear weapons.

Streep plays a female version of former president Trump. The fictional president is given to nepotism and sex scandals, as well as opportunism. She discovers that the asteroid contains trillions of dollars worth of metals. Instead of diverting it, she attempts to fragment the asteroid and recover the metals. The president’s moves could be a warning about the potential of lithium. Lithium is in short supply due to electric vehicles (EVs), which require battery power.

Lithium is a major ingredient. Lithium is a metal found in the earth’s crust and under the sea. It is not freely available. Lithium has unique properties that make it vital for batteries.

Tesla is the standard bearer of EVs. Tesla has a market capitalisation of around US$947 billion ($1,272 billion). This is three times the market cap of the next four largest automakers. Tesla’s astonishing rise reflects the seismic change in the auto world. Tesla’s 2021 sales doubled in the middle of a pandemic. In contrast, traditional autos like General Motors Co have floundered.

Citibank expects Tesla’s sales to rise at a CAGR of 20% in 2022-7. This is four times the projected growth for traditional autos. EV sales are rising across the board including Bayerische Motoren Werke, better known as BMW, and Toyota Motor Corp.

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Electric cars are cheap to operate, costing about two cents a mile to run. Petrol-powered cars are six times as expensive to run. However, the batteries have been costly. A single charge can sustain a car for 250 miles. That is about six gallons of petrol.

But, battery design is moving rapidly in favour of lithium. Telsa’s lithium ion batteries cost about US$1,200 per kilowatt hour. Tesla is launching a so-called “million mile battery”, which would cut the cost to US$100 per kilowatt hour. Lithium would then emerge as the powerhouse of the auto industry.

Tesla’s stock price has risen seven-fold in the Covid era. This has not been matched by a rise in lithium prices which are up four times to US$40,000 per tonne. Lithium carbonate prices have rocketed to record highs due to strong demand from Chinese battery makers. Lithium prices are just getting started.

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The case for lithium is rock-solid in the pandemic. Climate change is a compelling issue. EVs are not just cheaper, but they are less pollutive. Massive incentives will support EVs. In Europe, EVs are exempt from taxes. In the US, EV owners get US$7,500 in state tax breaks.

Lithium has a narrow supply base, compared to oil. The main producers are Australia, Chile and China. Supply growth has been tepid in the last decade. Tesla plans to produce up to 1.5 million EVs per year till 2025. Others will produce a similar amount. If so, the demand for lithium would be twice its supply by 2025. Serbia has cancelled lithium licences for Rio Tinto. This move will create a supply shortage till 2025.

Direct investment in lithium is difficult. Lithium cannot be bought in a commodity exchange, like oil and gas. Futures contracts and swaps are rare.

The best way to play lithium may be through listed companies. The largest lithium producer is a New York-listed Chilean company, Sociedad Quimica y Minera de Chile, better known as SQM. It also produces chemicals, which cuts the lithium exposure.

There is an ETF that tracks lithium stocks — Global X Lithium. Its major holdings include SQM and American lithium producers FMC Corp and Albemarle Corp.

Don’t Look Up shows a greedy president trying to extract minerals from a comet. The president looks to the sky for lucrative commodities. In real life, we need to look below for lithium.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in these columns

Photo: Meryl Streep plays the US president in "Don't Look Up" who is more interested in extracting the minerals in the comet than saving the rest of humanity / Netflix

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