How Lithium Can Power Your Portfolio

by Aaron Levitt | June 27, 2012 12:18 pm

When it comes to commodity investing, basic materials like crude oil, copper and corn often top investors’ go-to lists. After all, these are some of the world’s most liquid and largest markets, pricing is easy to understand and you have plenty of publicly traded companies to choose from.

Yet, a number of viable alternatives in commodities are more closely linked with economic activity. Materials like zinc have far more industrial and practical use than something like gold. However, their market volumes come nowhere near the popular precious metal.

But sometimes it can pay to go against the grain when looking for smart investments., such as making informed bets on now-shunned coal[1].

Another such overlooked commodity is lithium. Investors almost know nothing about the metal, especially when comparing it to its sexier cousins such as silver or copper. Lithium isn’t traded on an exchange. It’s sometimes priced as a salt or a metal or a combination of the two, and it’s produced by an oligopoly of firms, one of which looks like a good bet right now.

All of this complexity helps underscore why investors often ignore lithium. However, as we continue to live more mobile lives, demand for the lightest conductive metal on the periodic table is set to skyrocket amid supply pressures.

Investors willing to look past standard commodity convictions and take a chance on the white metal could be richly rewarded over the long haul.

Everywhere You Look

Odds are, the computer you’re reading this article on has some lithium locked inside it. Same for your iPhone, digital camera and quite possible your car. Already, the metal is used in wide variety of applications that range from medicine and lubricants to nuclear weapons and ceramics. However, the real future growth for the element will come from its ability to store energy.

According to the U.S. Geological Survey[2] (USGS), lithium can store roughly three times the energy of competing materials at one of the lightest weights. Moreover, it can be charged and discharged hundreds of cycles without substantial degradation and memory effects. And lithium loses very little charge when sitting idle.

Additionally, mining and recycling it is more environmentally friendly when compared to existing nickel-metal hydride (NiMH) or lead-acid battery technologies. These factors make lithium one of the most attractive advanced battery materials around.

Overall, lithium’s use in technology has been growing about 20% a year since 2000. But the potential game-changer for demand is the rechargeable lithium-ion battery.

Due to their low weight-to-energy nature, these batteries are becoming the standard in high-tech devices and have already replaced traditional nickel-cadmium batteries in many electronics. Over 90% of laptops use lithium-ion batteries, and they power over 60% of cell phones. This weight-to-energy ratio is a key reason carmakers have chosen it for hybrid and plug-in hybrid electric vehicles.

Toyota’s (NYSE:TM[3]) Prius, considered a niche vehicle when it launched 15 years ago, was the world’s third-best-selling car line in 2012’s first quarter. Its success and that of pure-electric vehicles like Tesla’s (NASDAQ:TSLA[4]) Roadster has cemented lithium-ion as the go-to transportation battery.

This doesn’t even take into account the potential demand coming from the solar and wind industry and the need for grid-sized storage products.

As global adoption of mobile devices and hybrid/electric vehicles continues to skyrocket, lithium demand will keep climbing[5]. Worldwide shipments of smartphones are set to grow 38.8% in 2012. And driven by the success of Apple’s (NASDAQ:AAPL[6]) iPad, worldwide shipments of tablet PCs are projected to be 107.4 million units this year.

All this has prompted several analysts to raise their predictions for long-term lithium demand. Commodity analysts at Dahlman Rose estimate that global consumption will double to 300,000 metric tons a year by 2020. Likewise, Peter Oliver, CEO of top producer Talison (PINK:TLTHF[7]), said in an interview with Bloomberg[8] that he expects lithium demand to grow at 10%-15% a year throughout the near future. And, he added, “if electric vehicles take off in a big way in the next 10 years, it could be as much as tripling.”

Betting on the Oligopoly

Unfortunately, because lithium futures aren’t traded on an exchange, there are just too many different ways end users can buy the material from suppliers. For investors wanting to get in on the action, that means betting on the oligopoly of firms that produce the metal. Aside from Talison, the trio of Rockwood Holdings (NYSE:ROC[9]), Sociedad Quimica y Minera de Chile (NYSE:SQM[10]) and FMC (NYSE:FMC[11]) control most of the world’s production in lithium.

Additionally, mega-miner Rio Tinto (NYSE:RIO[12]) is preparing to enter the lithium business by opening a new mine in Serbia. Once that facility begins production, it will be capable of producing roughly 20% of the world’s output.

Still, my hands-down favorite has to be SQM. Historically, Chile has been the top producer of lithium from brines, and already SQM leads output of refined lithium with a 21% global share. It currently operates a plant capable of producing 48,000 metric tons (MT) per year. Analysts at Credit Suisse estimate that the firm’s operating cash costs are roughly $1,500 MT per year versus the estimated $4,000 industry average.

However, the love for SQM doesn’t stop there — it’s actually a two-theme play in one. The company is also a leading producer of specialty plant nutrients and fertilizers[13], including potassium nitrate, sodium nitrate and specialty blends for various crops. That gives your portfolio exposure to one of the biggest long-term investable themes: feeding our growing population.

Finally, SQM is the only member of the oligopoly whose stock has been in the red for 2012. That lets investors pick up a long-term winner on a dip.

Aaron Levitt doesn’t own any securities mentioned here.

  1. informed bets on now-shunned coal:
  2. U.S. Geological Survey:
  3. TM:
  4. TSLA:
  5. lithium demand will keep climbing:
  6. AAPL:
  7. TLTHF:
  8. interview with Bloomberg:
  9. ROC:
  10. SQM:
  11. FMC:
  12. RIO:
  13. plant nutrients and fertilizers:

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