Lithium

Lithium                                   Source

Lithium (chemical symbol: Li) is the lightest of all metals. It does not occur as a pure element in nature, but is contained within stable minerals in a range of hard rock types or in solution in brine bodies within salt lakes, in sea water or geothermal brines. The contained concentration of lithium is generally low and there are only a limited number of known resources where lithium can be economically extracted.

Lithium can be processed to form a variety of different chemicals depending on its end use. According to Roskill Information Services, lithium carbonate represents approximately 48% of the total global consumption of lithium chemicals (25% technical-grade lithium carbonate and 23% battery-grade lithium carbonate).
The next most common chemical is lithium hydroxide which represents 16% of total global consumption. Other forms of lithium consumed include lithium bromide, lithium chloride and lithium minerals.

Lithium and its chemical compounds exhibit a broad range of beneficial properties, including:

  • the highest electrochemical potential of all metals,
  • an extremely high co-efficient of thermal expansion,
  • fluxing and catalytic characteristics, and
  • acting as a viscosity modifier in melts.

As a result of these properties, lithium is used in numerous applications including ceramics and glass, batteries, greases, aluminum, air treatment and others.
Future demand is projected by Roskill to grow at an annual base rate of 9.7% until 2017 with optimistic forecast at 15.7% annual consumption growth. Consumption of lithium in volume terms with be largely driven by the rechargeable battery market which is predicted to grow 21.5% annually.

Lithium-ion batteries have become the most important storage technology in the areas of portable and mobile applications (e.g. laptops, cell phones, smartphones, tablets, power tools, medical devices electric bicycles, electric cars) since around 2000. Lithium's high electrochemical potential - it has the highest electric output per unit weight of any battery material - makes it the standard material for lithium-ion (high energy-density rechargeable) batteries.

While portable consumer goods alone continue to provide impressive growth in demand for lithium batteries, the start of mass production of hybrid, plug-in hybrid and electric vehicles presents the most significant upside "step growth" potential for lithium demand, and especially for lithium hydroxide, for its superior performance compared to lithium carbonate. This is especially important for EV manufacturers like Tesla (TSLA) and Toyota (TM) who only use this type of lithium product, as they want maximum performance combined with the lowest possible battery weight. Lithium hydroxide appears to have large upside potential, independent market researchers like Roskill forecast a much faster growing lithium hydroxide market.
There is no exchange traded market for lithium chemicals, as prices are set by negotiation between producers and customers often based on customer-specific formulations. Prices for lithium concentrates used for conversion into chemicals are correlated to, and tend to follow the same trend as, lithium carbonate prices. Lithium hydroxide (LiOH) isn't more expensive than lithium carbonate (Li2CO3) although this is somewhat strange, as it invariably involves more processing to get from carbonates to hydroxides.

Much of the new lithium production coming online is still focused on carbonate (brine production) and concentrates. Shortages are expected due to the huge expected growth in very large battery factories, but a comprehensive report by Morgan Stanley from February 2018 projected serious oversupply issues because of many new projects and expansions coming online soon. I beg to differ on this subject as it has been very hard for the majors to expand, and new projects experience lots of delays and setbacks, lithium isn't easy.

But the US-China trade war and more importantly China setbacks in growth have diminished the endless optimism on EV and lithium products since Q1 2018, causing most lithium stocks to crash since. World production is dominated by 3 companies, Albemarle, FMC and SQM. Neither of them is a pure play or is dependent on lithium revenues btw.

As can be seen in the chart above, taken from the Lithium Americas presentation (which is the best public indication on lithium product spot and contract pricing available), Orocobre contract prices dropped below spot prices in the summer of 2018, and SQM contract prices are still above this, but are dropping too. I firmly believe that new entrants can't fetch anywhere SQM's contract prices anymore, which obviously as an established major negotiated better and more long term prices than Orocobre. Please note that Orocobre's price levels for LCE have dropped below US$10,000/t since Q1 2019, whereas most developing lithium projects use far higher long term LCE prices, based on moving averages, which is very risky of course in this case, right after a panick hype. In order to be conservative, one should use 10-20% below contract prices (spot prices are completely useless in lithium production, as large scale projects only sell their products through contracts). The question is if Orocobre price decks should be used for reference, SQM's or in between. Take into account the size of both companies, and refer to the project you would like to compare. Usually these projects are much smaller than SQM.