In case you missed it, Jon Hykawy’s Stormcrow Capital put out a comprehensive report on the lithium industry last Friday.
In the report, Stormcrow looks at lithium demand from no less than nine different sources, including glass, ceramics, greases and air-treatment applications. While demand from several of those areas is rising steadily, the report confirms what many lithium investors already know: battery use will drive lithium demand going forward.
Specifically, the firm believes that “overall lithium demand will more than double from present levels through 2025.” It expects that increase in demand — alongside stable supply — to lead to a higher lithium price.
Taking a closer look at the battery side of things, Stormcrow drew attention to predictions made by Avicenne regarding battery demand growth. It noted that while there’s plenty of excitement in the lithium space over Tesla’s (NASDAQ:TSLA) gigafactory and other similar projects, Avicenne “appears to have remained grounded in the principle that lithium demand depends on end-user battery demand, not on the scale of the factory constructing the batteries.”
Importantly, Stormcrow also noted that battery costs are not dominated by the cost of raw lithium, and found that a rising lithium price won’t translate to vastly higher battery costs – an important concern for those who might be worried that rising costs could hurt demand. ” [A]ssuming reasonable margins in the production of lithium-based battery cathode chemicals, even a large increase in the cost of lithium should result in only a very small cost increase in the batteries themselves,” the report stated. “Clearly, while not welcome, an increasing lithium price does not represent an insurmountable hurdle for the battery industry. ”
Furthermore, the firm doesn’t see another disruptive technology taking over for lithium in the near future. It pointed out that lithium ion batteries were “essentially invented in the 1970s, and have only truly become ubiquitous in the last few years,” and that even if a technology capable of outperforming lithium batteries arose, it would have to contend with the substantial cost reduction enjoyed by lithium cells due to manufacturing scale.
Stormcrow gave an overview of some of the benefits and issues surrounding brine and hard-rock lithium production. For example, brine production is cheaper, but currently takes 12 to 18 months and can be held up by unfavourable weather, while hard-rock is more expensive, but features a “short and direct path to producing product.”
Looking at future supply, the firm expressed skepticism that current lithium suppliers would be able to “open the floodgates of lithium production” to eliminate the need for new producers in the face of a higher lithium price. “We attended a conference in 2009 where SQM (NYSE:SQM) management indicated they could expand lithium production at any time they saw strong prices,” the firm said, “… Prices have roughly doubled since then. SQM’s Li production, a byproduct of their much larger potassium business, has remained flat.”
Beyond that, it noted a number of obstacles in the form of logistics, permitting and/or government regulations that could get in the way of a production ramp-up for current lithium producers.
That said, Stomrcrow does believe that RB Energy’s operations and Galaxy Lithium’s Sal de Vida will eventually get back on track, and it noted that Orocobre (TSX:ORL) is also expected to commence production this year. Lithium Americas (TSX:LAC), with the help of POSCO’s (NYSE:PKX) extraction technology, is also expected to move forward, although Stormcrow stressed that “POSCO’s technology is not the only alternative technology in the lithium space that is being developed, and is likely not the least expensive method of production, either.”
Still, the firm is calling for a fairly stable production picture through 2025, with any upside surprises in total production unlikely, at least through 2020.
As one might expect, Stormcrow saw rising demand and stable supply leading to stronger a lithium price, especially when it comes to battery grade lithium carbonate and lithium hydroxide. The price is expected to rise from approximately $7.08 to $9.39 per kilogram for battery grade lithium carbonate and lithium hydroxide by 2025, and from $5.89 to $7.56 per kilogram for technical grade lithium carbonate.
Stormcrow provided a much more in depth explanation of how they arrived at those predictions, and while we don’t include it here, it’s definitely worth a read (see link below).
Even though the firm appears to have provided a more measured look at the lithium space, there are certainly a number of positive signs for lithium. “This is likely to be a boom period for companies that are making lithium, and investors would be wise, we believe, to act early on this opportunity,” the report concluded.
To see full disclosures from Stormcrow Capital and to view a full copy of the report, click here.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.