The electric vehicle revolution is coming. That is long-term bullish for lithium prices and lithium-related mining plays because of lithium-ion battery needs.
We don’t think it’s time to buy lithium plays right now, but we are keeping tabs on the space. Lithium and cobalt prices saw a big run-up in 2017, and then crashed. Top lithium mining plays like Albemarle (ALB) also saw a big run-up and crashed, losing 50% of value or more from peak to trough.
From a behavioral perspective, a boom-crash-and-recover sequence of events is normal for an exciting new market.
When investors discover a legitimately world-changing technology, they tend to front load their excitement into asset prices. This causes valuation multiples to soar as expectations get out of hand. Prices run up as if the revolution will take hold tomorrow, or next week or next month at the latest. Then reality sets in — large-scale technological change doesn’t happen overnight — and disappointment leads to big valuation declines.
But after the euphoria wave and the follow-on disappointment wave, a real buying opportunity then emerges. If the world-changing technology is real, the uptrend eventually resumes and lasts for years, driven by permanent upward shift in the demand curve. That is where life-changing investment gains can be made.
Sadly, many investors miss these types of opportunities because emotion gets the best of them. They get in too early — when the news was “hot” — and then turn sour on the industry or sector in the washout period, before the real bull trend begins.
Lithium-ion batteries will grow more popular in all kinds of devices in the coming years. But the game-changer will be the rise of electric vehicles (EVs).
The production of EVs will go vertical in the next few years because governments are demanding it. There is no choice in the matter. The global automakers are poised to invest hundreds of billions of dollars in new EV production lines, and the process is already starting.
For China and India, pollution is becoming a life-and-death issue. The air quality in many Chinese cities is so bad it is legendary — and India’s big city air quality is actually worse than China’s. If pollution is not reined in, long-term economic growth will be threatened.
That is why China and India are both taking initiatives to require minimum quotas of EV production. Some analysts think China’s government could soon announce plans to phase out combustion engines entirely.
Europe is also moving aggressively toward electric vehicle production, with government policies and consumer sentiment leaving little choice in the matter. While Europe does not have five-alarm-fire levels of air pollution like China and India, Europe’s citizens are strongly in favor of “green” actions to reduce emissions and fight global warming.
What this means is that, in the largest auto markets in the world — all of them but the USA, and that could change after 2020 — the internal combustion engine is under assault. The global automakers have no choice other than to ramp up EV output. That, in turn, means a massive long-term demand ramp for metals like lithium.
The starting gun has already been fired. Volkswagen is one of the top three automakers by volume, and frequently claims the top spot for annual vehicle production. In November 2018, Volkswagen announced roughly a third of its $150 billion research and development budget over the next five years — about $50 billion dollars — would be devoted to EV production and self-driving car technologies.
And then, on March 12 — earlier this week — Volkswagen’s CEO announced plans to accelerate their EV rollout to an even faster timeframe, with more than 70 new electric models planned for the coming decade. Many will arrive as soon as 2020.
Volkswagen, as you may know, is the parent company not just of the VW brand, but high-end powerhouses like Porsche, Audi, Bentley, Bugatti, and Lamborghini. There is already huge anticipation for the Porsche Taycan — the first true EV from Porsche — with the first year of production sold out. The Audi e-Tron could see similar levels of demand when it arrives.
Volkswagen is not alone. The other big automakers are collectively spending huge amounts. Total spend on EV production could be as much as $300 billion over the next five to 10 years. Low-priced EV models are also on deck for China and India, where initiatives are in place to install millions of charging stations in the next few years.
The play here is not to buy the global automakers. Car manufacturing is historically a lousy business. Ramping up EV production will be very expensive, requiring heavy capital expenditures for new plants and new equipment. The car makers are spending big on EV because they have to, not because they want to, and their profit margins were never great to begin with.
Lithium miners, though, will directly benefit from the EV ramp-up in the medium to longer term. Lithium is the metal of choice for EV batteries because of two key factors: energy density and strength-to-weight ratio.
As EV production ramps up, demand for lithium-ion batteries will enter a virtuous cycle. More scale will lower battery production costs, as plant and equipment costs get spread out over a greater number of units sold. At the same time, EV technology will keep improving. At the tipping point, which could happen in the next few years, EVs could become cheaper to operate than gasoline-powered cars, with greater driving range besides.
This is all long-term bullish for lithium prices and a handful of related mining plays. Investors anticipated a lithium and cobalt boom two years ago, but the trouble is they were too early. Expectations of a shortage caused prices and miner valuations to skyrocket, but the shortage failed to materialize as miners stepped up production and supply outpaced demand. From a big picture perspective, it was just too early.
As of this writing, the supply-demand picture for lithium is unclear. Some analysts see supply outpacing demand for a while yet (which would be bearish). But with the rise of EVs in general, and lithium-ion batteries specifically, we can know with near certainty that “lithium is the future.”
Governments already have zero-emission rules and mass-scale EV initiatives on the books — remember the millions of new charging stations all across China. And the big automakers have already allocated eye-bulging sums — running to hundreds of billions total over the next decade — to be spent on EV production platforms.
Below, we have a selection of stocks from LIT, the Global X Lithium and Battery Tech ETF. As you can see, our indicators say it’s too early to buy these names. The investors who got overly bullish on lithium two years ago, and prematurely bid up everything in sight, are still in a pessimistic mood.
At the same time, lithium miners and battery technology producers are worth keeping an eye on.
It isn’t often that investors get a clearly telegraphed signal from government regulations and global automakers alike of a big multi-decade demand wave that is coming. Demand for lithium-ion batteries to put in EV vehicles, and thus demand for lithium itself, is just such a wave.
As high-end EVs like the Porsche Taycan and Audi E-tron get closer to their widely publicized rollout, sentiment could turn positive again for the lithium demand picture, and thus for lithium miners. We’ll be watching.