Rock Tech in the News
On Wednesday of last week, the leading German-language business newspaper, the Handelsblatt, published a story on recent developments and opportunities in the lithium market. Rock Tech’s chairman was contacted for this story, along with a few other industry experts, to discuss the current state of the market and where we see the industry heading.
You can click on the following image to read the German-language article; an English translation follows:
White Gold at a Low Price
The prices for lithium are going through a weak phase. This does not fit in with the ambitious plans of car manufacturers on the subject of electromobility. Experts therefore see upside potential for the shares of lithium producers.
When the who-is-who of the automotive industry meets at the IAA trade fair in Frankfurt in a few days’ time, German manufacturers will want to shine as advocates of electromobility. Porsche has just introduced a Tesla fighter with the Taycan model, VW wants to score points with the electric car ID and Daimler also wants to present news from the electric model series EQ. But at the other end of the value creation chain, there is little sign of this atmosphere of optimism.
The producers of lithium, the most important metal for electric car batteries, are in a state of crisis. Since the beginning of 2018, for example, the price of lithium carbonate, an important intermediate product for battery production, has almost halved from over $21,000 to $11,000 per tonne. The share prices of the major lithium producers Albemarle, SQM and Livent have also fallen by between 20 and 55 percent.
The market for battery metals is in an absurd situation. The fear of a short-term oversupply has caused the price of lithium in particular to collapse. At the same time, manufacturers of electric cars and batteries are outperforming each other with increasingly ambitious production targets. Next year, for example, VW plans to sell 100,000 units of its ID electric car. Market experts are therefore convinced that the lithium price weakness can only be short-lived. For investors who are convinced of the breakthrough of electromobility and are willing to bear a large risk, the time of entry could be favourable.
An important reason for the price weakness of the “white gold” is the hot rally that preceded the collapse. Between early 2016 and mid 2017 the price of the light metal had risen by more than 170 percent. As a result, dozens of new exploration projects were launched worldwide. In the German “Erzgebirge” area, for example, and there are also advanced plans to expand the salt desert of Latin America and solid rock mines in Australia. The young lithium market shows the pattern investors know from gold and oil: The rally is followed by fear of overcapacity – and finally by a deep fall.
But the vast majority of market experts are convinced that the price of lithium will have to go up again. Andrew Miller, analyst at the industry research house Benchmark Minerals, speaks of a “price paradox”: “Share prices and investor sentiment continue to be determined by short-term price trends rather than fundamental data.” The capital markets “are failing to respond to the foreseeable large supply shortfall, even though the revolution in electric mobility is gaining momentum.”
Grant Sporre, chief analyst for metals and mines at the investment bank Macquarie, sees this similarly: “The demand outlook for the price of lithium is very promising.” However, he assumes that the weak phase will continue until the end of the year and that the price per tonne will continue to fall. With a falling price , less competitive exploration projects will be swept off the market. In addition, the three major players, Albemarle, Livent and SQM, had already announced that they would cut back their investments, says Sporre.
Within the fragile value-creation crisis from raw material to battery, there are signs of a bottleneck, especially in refinery capacities. The hard rock mines in Australia, for example, extract the ore from the ground, crush and concentrate the rock and produce so-called spodumene, which contains around six percent lithium. The spodumene is then shipped to a chemical refinery, usually in Asia, where it is processed into lithium carbonate or lithium hydroxide. There is currently enough spodumene, but refinery capacities are already scarce. “The market for lithium carbonate is completely sold out,” says Dirk Harbecke, Chairman of the Canadian mine developer Rock Tech Lithium. “We are in a critical phase,” he is convinced, because “now is the time to secure the supply for the coming years.”
According to Benchmark Minerals, that’s what it looks like: Producers have announced that they will increase their refinery capacity by 500,000 tons of lithium chemicals by 2020. But “in reality it will be less than 40 percent of this announcement,” analyst Miller is convinced. With a consequence: “At some point the foreseeable supply deficit will cause prices to explode and lithium stocks to rise massively,” says mine developer Harbecke. “However, the trigger is still missing that will lead to investors getting back in again. They are insecure and on the sidelines.”
Time’s up, Miller adds. “The investor’s money must flow quickly into the lithium market.” Otherwise the pace of electrification would be impossible to maintain. This is supported by the announcements of numerous “megafactories” in which companies such as Tesla, Northvolt and Co. want to produce batteries. Benchmark Minerals estimates that the supply of lithium will have to increase by 19 percent each year over the next six years to meet demand in 2025. Even during the peak phase of the lithium price rally between 2015 and 2017, however, the companies increased their production by only eleven percent a year.
Lack of Transparency
Investments are hampered by a lack of transparency. There is not one lithium price, but a multitude of prices for different processing stages and markets. The London Commodity Exchange LME has been working since 2017 on the introduction of a futures contract, known also for gold or oil. But the introduction has always been delayed. “When the market is ready,” the forward contract will be launched, says the LME. But the big producers like Albemarle have already announced that they will continue to sign contracts directly with their customers.
As long as there are no futures contracts yet, investment products that enable private investors to profit directly from a rising lithium price are also scarce. The only way to date is to buy shares in companies that are active in the lithium business. In addition to Albemarle, SQM and Livent, a spin-off that the US chemicals group FMC recently placed on the stock exchange, there are also a number of companies that are developing new lithium deposits. In order to keep an overview, however, investors must be very well-informed. Or they can rely on one of the few specialized fund providers that often have high costs and low fund volumes.
One of the few products available in Europe is the “Structured Solutions Next Generation Resources Fund” (ISIN: LU0470205575) of the asset manager Commodity Capital. According to the fund, 80 percent of its assets are lithium stocks. The “Solactive Global Lithium Index” (WKN: A1EY8J) gives investors an impression of the battery market. In addition to large and small mining companies the market barometer also includes the shares of battery manufacturers such as Samsung SDI, LG Chem and Varta, as well as the shares of e-car manufacturers Tesla and BYD. So far, however, with Global X there is only one US asset manager that offers an index fund (ETF) based on the Global Lithium Index (WKN: A143H3). However, this ETF is not available through most German online brokers. And investors should rather keep their hands off firms on the barely regulated grey capital market who promise to invest in “technology metals” or rare earths.
If you want to profit from a possible lithium rally, there is hardly anything left to do but buy individual shares – or hope for a professionalization of the investment products market. But by the time that happens, prices could already have risen again.