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Between the activity of major lithium producers, mining in China and developments in the wider electric vehicle market, there will be plenty to watch for in the lithium space in 2015. Chris Berry sees continued consolidation in the cards, and believes that while some new supply is expected to enter the market, there remains a slight overcapacity.
For our 2016 lithium outlook, please see Lithium Outlook 2016: What are Analysts Saying?
Tesla Motors (NASDAQ:TSLA) certainly made 2014 an exciting year for lithium. Looking forward, however, Tesla isn’t the only factor lithium market participants may want to consider — between the activity of major producers, mining in China and even developments in the wider electric vehicle market, there will be plenty to watch for in the lithium space in 2015.
Lithium Investing News spoke to Chris Berry, president of House Mountain Partners and co-editor of the Disruptive Discoveries Journal, about what investors can expect from the lithium space next year and what might be important to keep an eye on.
To start off, Berry said he sees more consolidation in the cards for the lithium space, stating that while some new supply is expected to enter the market, there remains a slight overcapacity. “This means a focus on low-cost production and balance sheet strength are an absolute must [for companies],” the analyst said.
Of course, with Albemarle’s (NYSE:ALB) acquisition of Rockwood Holdings (NYSE:ROC) set to close in the first quarter of 2015, that trend has already begun.
Overall, he suggested that the lithium space won’t reach its real inflection point until 2017, but noted that the time will provide investors with a good opportunity to get educated about the industry.
Meanwhile, James D. Calaway, chairman of Orocobre (TSX:ORL,ASX:ORE) was more positive on the nearer-term outlook for lithium. “We anticipate rapidly growing demand and constrained supply,” he said in response to a survey on the market. “This should be reflected in strong pricing in 2015 and 2016.”
Calaway explained that “[m]uch was promised … but not a great deal delivered,” in terms of supply in 2014, and although it’s been difficult to get an accurate reading on the supply side of the lithium industry, he believes there are already price increases going into 2015 that could be indicative of the supply balance outside of China.
Factors to watch for in 2015
While lithium has no doubt been a welcome exception to the performance of other metals in 2014, Berry cautioned that there are several important factors worth watching next year. First, while Tesla has no doubt been a boon for the lithium industry, its effect could go both ways.
“The stock is arguably priced for perfection,” Berry said, “so any consistent misses in sales targets or delays in rollouts of future models (Model X, for instance), could have negative implications for the lithium market — in particular the junior mining companies hoping to join the ranks of producers.”
He’s also closely watching prices and demand for by-product commodities such as potash, pointing out that “[a]ny sustained fall in potash demand or lower pricing will affect the overall economics of a lithium project that may depend on a potash by-product credit to lower the overall cost of production.”
On top of that, Berry pointed to a struggling global economy and falling oil prices as factors that could put a dent in lithium demand. Cheaper prices at the pump could lower demand for electric vehicles, which might inadvertently take focus off of lithium exploration or development.
More broadly, he suggested keeping an eye on lithium product pricing (for example, FMC’s (NYSE:FMC) recent price hike), capital expenditures by lithium producers and mining activity in China as indicators of lithium supply and demand. For example, rising environmental concerns in China could possibly lead to mine shutdowns.
Finally, Berry said that keeping an eye on battery research and development is a must given the “exorbitant amount of R&D money” going into the space; however, he added that “it could take a decade or more for any major paradigm shift to really integrate into global supply chains.”
Companies to watch
Some lithium companies have been getting a positive response despite the wider state of the commodities market. One is Orocobre, which Berry pegged as one to watch in 2015. It reached first production at its Olaroz project in November, and intends to ramp up production next year. ”Given our position and growing credibility in the lithium sector, we are fortunate to have a receptive capital market willing to support our management and team,” Calaway said of his company.
Berry also recommended keeping an eye on Lithium Americas (TSX:LAC) in 2015 given its agreement with Korean steelmaker POSCO (NYSE:PKX), and suggested watching majors such as SQM (NYSE:SQM) for indications of wider trends.
“Currently only about 10 percent of their revenues come from lithium and associated products,” he stated. “An increase in this percentage is a good clue on the trend in both pricing and volume growth.”
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Related reading:
Lithium in 2014: Tesla Takes Center Stage