Eyes Set on Lithium

Sobhon Khairy

October 16th, 2018

As technological advances are driving human progress and economic development, one mineral is becoming increasingly important: lithium. It is the lightest and least dense solid element on the planet and due to its high reactivity, it does not exist as a pure element in nature, but rather it can be found within different hard rocks or brine solutions. Lithium deposits are evaluated by their lithium-grade, by-products, impurity levels, and proximity to refining or transportation infrastructure. Global lithium markets are expected to grow at a compound annual growth rate of 12.93% from 2018-2022. This predicted growth is a direct result of lithium’s key role in lubricant grease, glass, ceramics, health products, batteries, and power grid storage. One of the most promising applications of lithium is batteries. The element offers an optimal combination of energy density and price. In recent years, the demand landscape has continued to shift towards applications in transportation and energy storage. Non-battery applications in addition to batteries in the traditional market are expected to lose a respective 30% and 13% of entire world demand from 2015 to 2025, while demand for electric vehicles and e-bikes is expected to soar by 24% and 13%, respectively. The compounding effects of the increase in demand for residential and non-residential buildings in APAC countries along with investments from the US, Chile, Australia, China, Germany, the UK and Canada will further drive demand growth.

Lithium reserves are primarily located in Asia, Africa, Australia and the Americas. However, South America contains 66% of the entire world’s reserves. The majority of this valuable mineral is found in the “lithium triangle” between Chile, Bolivia and Argentina. Chile holds the most lithium reserves in the world with much of it extracted from a single massive mine in Salar de Atacama, which is believed to hold roughly 6.8 metric tons of lithium reserves. Although Chile has the biggest reserves, the biggest lithium producer is Australia. Operations at the Australian mines Mt. Cattlin and Mt. Marion are expected to alleviate the world’s supply crunch. POSCO, a Korean steelmaking company, is exploring the refinement of lithium without the use of evaporation, which would decrease the capital costs associated with mining a lithium reserve. The current high costs of mining means it is not economically profitable to extract many reserves, but if the evaporation research and implementation prove successful, the world’s accessible lithium reserves will grow substantially.

The complex and specialized processes of lithium mining, along with its enormous capital costs, have created high barriers to entry into the lithium market. This has lead to the rise of a few industry giants. Sociedad Quimica Y Minera (SQM) of Chile, FMC Corporation of the US, and Albemarle of the US were once the three main players, but Sichuan Tianqi Lithium Industries of China has recently gained dominance of the lithium market. SQM has a lithium market share of 26%, but is looking to increase production with new projects in Argentina. FMC Corporation has 12% of the market share, with most of their sales in lithium specialty products. In 2015, Albemarle acquired Rockwood Holdings, increasing their market share to 20%. Albemarle will continue to grow as they push for upgrades in mining facilities at the Australian Greenbushes mine, of which they own 49%. The combined market share of SQM, FMC Corporation, and Albemarle dropped from 85% to 53% due to of the rise of Sichuan Tianqi Lithium Industries of China. These markets are growing, but at the same time ownership is changing because of Tianqi. The Chinese producer had a market share of 40% as well as 51% of the Greenbushes mine in Australia, but after buying 25.9% of Chilean SQM for 4 billion US dollars, they now own most of the world’s lithium market. The deal is facing a threat from Chilean regulators who might block the transaction in fear of market distortion. However, this scenario is unlikely taking into consideration the investment-friendly policies of billionaire Harvard-educated economist and Chilean President Sebastian Pinera’s policies and his favorable relations with the Chinese business community.

How does lithium dominance play into Chinese grand strategy? Notably, the growing Chinese population and the popularity of electric vehicles will fuel lithium-dependent development in China. By owning more lithium, China will be lithium-independent, allowing them to fuel their own rapid development and supply capital to investment projects around the world. China sold more than 750,000 electric cars in 2017, which represents a more than 50% increase from 2016. Chinese officials want electric cars to make up 20% of the new cars sold in China by 2025. In addition to fueling their economic development, lithium dominance is another tool of Chinese foreign policy that will award them more economic leverage. With a growing grip on the world lithium supply, the Chinese will be able to manipulate the lithium market, and as a result, they will gain another economic foreign policy tool to use at their disposal. Control of the world’s lithium is a powerful bargaining chip.

Disclosure:

Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions reflect the market conditions when written.