Lithium

Despite the current negative sentiment in the lithium space, there are a number of reasons why investors could be interested in lithium stocks.

Some seasoned metals investors might be interested in looking beyond silver and gold. New investors might be drawn into the space by the ever-increasing hype surrounding Elon Musk and Tesla’s (NASDAQ:TSLA) sweeping electric vehicle plans.

Whatever the reason, it’s important to get familiar with the lithium market before investing in lithium stocks. Here is a (very) brief overview of some of the basics.

The lithium rundown

Lithium is a soft, silver-white metal used in pharmaceuticals, ceramics, grease, lubricants and heat-resistant glass. It’s also used in lithium-ion batteries, which power everything from cell phones to laptops to electric vehicles — demand for lithium from this sector is growing quickly.

Lithium is found all over the world, in hard-rock deposits, evaporated brines and clay deposits. There’s some contention as to which type of deposit is superior, but generally there are trade-offs to consider in any option.

The world’s largest hard-rock mine is the Greenbushes mine in Australia, and the bulk of the world’s lithium brine production comes from salars in Chile and Argentina. Most large lithium reserves are in Chile, and the prolific “lithium triangle” spans Chile, Argentina and Bolivia. Australia was once again the world’s largest lithium producer in 2018, followed by Chile and China.

Battery grade vs. technical grade?

There’s more than one type of lithium product out there. Technical-grade lithium is used in ceramics, glass and other industrial applications, while battery-grade lithium carbonate and lithium hydroxide, which are much more expensive, are used to make lithium-ion batteries. These lithium products can also be used for technical applications in a pinch.

Current state of the lithium market

Tesla was the first carmaker to stoke a lot of excitement in the lithium space. The company’s Nevada-based gigafactory is what first began to drive lithium excitement, but it’s not the only lithium-ion battery megafactory that Tesla has planned.

Tesla is not the only firm with lithium-ion battery megafactory ambitions — as Benchmark Mineral Intelligence has pointed out, the megafactories in China are also rising. The firm expects the Asian nation to account for more than 50 percent of the world’s battery capacity for at least the next decade.

In short, the world will continue to need a lot of lithium supply, and, already, some of the major lithium miners are trying to make sure they’ll be able to provide it.

For example, top lithium miner Albemarle (NYSE:ALB) announced plans to double production at its Australia-based Greenbushes mine in early 2017. Then, in mid-2018, the company announced a second expansion. Another large lithium producer, Livent (NYSE:LTHM), which spun off FMC (NYSE:FMC) in 2018, revealed it is looking to acquire more projects to expand its access to lithium.

While there are already some delays expected to these and other expansions and despite some bearish sentiment toward prices, many experts and market watchers continue to be bullish on the long-term fundamentals of the metal, in particular lithium demand, as adoption of electric cars increases.

Lithium stocks, big and small

So where should investors interested in lithium stocks begin? To start, it helps to understand the lithium production landscape.

For a long time, most lithium was produced by an oligopoly of lithium producers often referred to as the “Big 3”: Albemarle, SQM (NYSE:SQM) and FMC. In addition to those lithium miners, Rockwood Holdings was on that list too before it was acquired by Albemarle several years ago, making Albemarle that much bigger.

However, the list of the world’s top lithium-mining companies has changed in recent years. The companies mentioned above still produce the majority of the world’s lithium, but China accounts for a large chunk of output as well. The Asian nation was the third-largest lithium-producing country in 2018 in terms of mine production, coming in behind Australia and Chile.

What’s more, Australia’s largest lithium mine, called Greenbushes, is majority controlled by China’s Tianqi Lithium (SZSE:002466). Tianqi Lithium owns a 51 percent stake in Talison Lithium, which runs the mine, while Albemarle owns a 49 percent stake in Talison via its acquisition of Rockwood Holdings.

All in all, the lithium market share for the “Big 3” lithium producers has dropped from about 85 percent to 53 percent, while China now has about 40 percent of the world’s market share. In the future, China is expected to fuel lithium-ion battery production, which is set to increase substantially in the coming years.

In other words, lithium investors need to be keeping an eye on lithium-mining companies in China in addition to the New York-listed chemical companies that produce the material.

Of course, smaller lithium stocks are worth watching too — to find out which ones are currently thriving, check out our top Canadian lithium stocks article. It’s updated on a quarterly basis when possible. You can also check out our top Australian lithium stocks article.

Exact lithium prices?

Getting a look at lithium prices isn’t easy, and that can make it difficult for investors who are looking to assess the viability of a given project. Pricing in the lithium industry has always been opaque due to the dominance of a few major producers, with investors having very little pricing information they can trust.

Simon Moores, managing director at Benchmark Mineral Intelligence, has emphasized that pricing can be a difficult concept for lithium investors to grasp. “The biggest myth surrounding pricing is ‘what is the price of lithium?’ because there is no one price,” he explained at a recent conference.

“The newcomers want one lithium price, but the existing market has a wide range of lithium chemicals and then grades within a specification,” he continued.

His company publishes six lithium carbonate grades with a minimum specification of 99 percent Li2CO3 purity, four lithium hydroxide grades with a minimum specification of 55 percent LiOH and a spodumene feedstock price with a standard specification of 6 percent Li2O.

Benchmark also releases broader global-weighted lithium average prices for lithium carbonate and lithium hydroxide, as well as a lithium price index, all on a monthly basis. For more on the methodology, click here.

Earlier this year, the London Metal Exchange launched efforts to bring more transparency to prices in the space, selecting price reporting agency Fastmarkets to kick off a lithium futures contract. Currently, the LME is publishing weekly midpoint prices for two of Fastmarkets key assessments for lithium carbonate and lithium hydroxide.