Lithium is a key metal used in powering electric vehicles, and demand may increase alongside electric car sales.
Why Is Lithium Important?
Lithium is an important raw material used to power devices that have become common in our everyday lives, from mobile electronic devices such as phones and tablets to storage devices such as power banks and backup power units. Perhaps most importantly, lithium has become a dominant material in the manufacturing of electric vehicles, and as millions of units are expected to be sold each year, demand for the metal may increase significantly.
While it’s not as valuable as precious metals like gold and silver, lithium is a sought-after metal for industrial uses. It’s one of the few elements on the periodic table that is an alkali metal, which is a soft metal that’s highly reactive to water.
Very few countries in the world produce large quantities of lithium. Chile and Australia are known to have very large reserves, while the U.S. has a fraction of the world’s total. The world’s biggest consumer of lithium is China, where companies use the metal to create batteries that power devices including mobile phones and scooters.
How Is Lithium Produced?
Lithium isn’t a type of metal that can be easily mined. It can be extracted from mineral ore deposits or below-ground brine deposits (typically found in areas where there are salt flats) before being processed to separate from the waste material. Lithium is more readily available from brine deposits than ore deposits but can take months, or even years, to process through solar evaporation in ponds. The resulting lithium carbonate is the material that is used further along the process to make products such as lithium-ion batteries.
Why Is It Difficult to Get Market Prices on Lithium?
Production of lithium is not as voluminous as it is for metals commodities, such as nickel or copper, and consequently, the metal doesn’t have available pricing on futures via a market exchange.
While countries such as Chile and Australia have the world’s biggest reserves, much of their lithium remains untapped and takes time to process, and the finished material, lithium carbonate, isn’t traded widely. Much of the lithium carbonate that is traded is typically in private hands, and prices aren’t widely available to the public. Companies in China, on the other hand, buy and use large amounts of lithium carbonate, and a market has developed in which there is a publicly available spot price quotation.
How to Trade and Invest in Lithium
Tracking prices on lithium can be a challenge because there isn’t a central market price. Trading in lithium is usually done privately, but there is at least one price quote that is accessible to the public. Investors and analysts can use tools such as the correlation coefficient to track whether a lithium producer’s stock is moving in the same direction as lithium carbonate over a period, or whether an exchange-traded fund’s price movement is the same as a stock index.
Just as with gold, monitoring prices can indicate whether shares of gold-mining stocks are moving in the same direction. Investing in lithium-mining stocks can serve as a proxy for investing in lithium itself. A publicly traded company’s quarterly or annual report filed with the Securities and Exchange Commission would reveal how profitable it is based on how much lithium the company is producing and at what price it is being sold. Additional information such as notes in the financial statements would reveal whether the company is tapping new mines or acquiring miners.
In China, pricing on lithium carbonate is quoted in yuan and per ton. While there are no details, such as volume of trading, it nevertheless serves as a useful proxy on price for the raw material.
Below is a graph of the price of lithium carbonate per ton in Chinese yuan. The price gained about 10-fold from early 2021 to mid-2022.
Strong demand for lithium carbonate sharply pushed up its price from early 2021 to mid-2022.
A widely followed index on lithium is the Solactive Global Lithium Index, which includes both global producers and users of lithium, including Pilbara Minerals Ltd. and Panasonic Holdings Corp. An index can serve as a useful benchmark on lithium when no recognized price measure is available.
The Global X Lithium & Battery Tech ETF (NYSE Arca: LIT) is one of the more popular ETFs tracking lithium. The ETF says it “invests in the full lithium cycle, from mining and refining the metal, through battery production” and it is benchmarked against the Solactive Global Lithium Index. Many of the stocks in the ETF also make up the Solactive index, and about half of the companies held by the ETF are based in China, as of July 2022.
Below is a 5-year graph of Global X Lithium & Battery Tech ETF, showing its rapid rise from early 2020 to late 2021.
The Global X Lithium & Battery Tech ETF more than quadrupled from early 2020 to late 2021.
Investors and analysts who track ETFs and indexes can look up constituent stocks. Some of the most widely followed stocks include lithium producers Albemarle Corp. and Piedmont Lithium Ltd. as well as Tesla Corp., which, in addition to using lithium-ion batteries for its electric vehicles, also produces lithium-based batteries for energy storage.
What Does the Future Hold for Lithium Investment?
Prices for lithium carbonate were in a bull market from early 2020 to mid-2022, helped in part by a pick-up in consumer purchases of electric vehicles. As demand for lithium continues to increase and production isn’t keeping apace, it’s likely that prices will be moving higher.
Demand is likely to continue to outstrip supply heading into at least 2030, as many countries push an agenda calling for more electric vehicle production and fewer gas vehicles on the road. Even if more countries step up mining and exploration, it will take time to produce lithium carbonate, the key material used in many of today’s popular consumer devices.