The stock prices of lithium producers have cratered, presenting a good buying opportunity.

Today, lithium-ion batteries are the primary technology used to power EVs, energy storage applications on the electric grid, and many consumer electronics. The transportation and electricity sectors are the two largest contributors to carbon emissions, both in the U.S. and globally; many governments have acknowledged this fact and mandated improvements to carbon efficiency in these two sectors. Thus, lithium-ion batteries are at the forefront of a tremendous opportunity to supplant internal combustion engines in cars and reduce polluting energy sources on the grid. In fact, the industry has already embarked on this huge secular growth trend.

The production of lithium is mostly concentrated in an oligopoly consisting of Albermarle (NYSE:ALB), SQM (NYSE: SQM), Livent (NYSE: LTHM, recently spun out of FMC Corp), Tianqi Lithium (002466.SZ (Shenzhen)), Orocobre (OTC: OROCF), and Jiangxi Ganfeng Lithium (002460.SZ). You can see the 1-year performance of these stocks below against the S&P 500 (SPY):

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Clearly, these stocks have materially underperformed the broader market. They cratered along with the rest of the market last December, but have not participated in the broader recovery in 2019 to date. The primary reason is that lithium prices have been on a significant downtrend:

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I believe this downtrend provides a great opportunity to go long this niche because of the long-term fundamental story. The first aspect of this story, as mentioned at the top, is the growth potential from the global expansion of the markets for EVs and energy storage. There are many independent data sources providing demand-side projections, such as the following:

- Global EV sales projected to grow at a CAGR of 32.57% during the forecast period, to reach 10.79 million units by 2025, from an estimated 1.50 million units in 2018. 

-          Wood Mackenzie: energy storage deployments will grow thirteen-fold over the next six years, from a 12 gigawatt-hour market in 2018 to a 158 gigawatt-hour market in 2024. 

-          Benchmark Mineral Intelligence: In less than two years — between October 2017 and February 2019 — the planned global lithium-ion battery capacity in the pipeline for the period 2019-2028 has risen from 289 GWh to 1,549 GWh.

The second aspect of the investment story is the oligopoly enjoyed by the producers. The small handful of companies noted above supply the majority (78%) of the global lithium market, have long experience and expertise in the production and processing of the mineral (it is not a simple operation), control the largest and lowest cost resources around the world, and are rapidly expanding production capacity:


From the 277k tons of total supply delivered in 2018, Morningstar’s equity research team expects supply to increase at a 19% CAGR to 1.5 million tons by 2028, and Roskill (an industry consulting firm) expects it to exceed 2 million tons by 2031.

Albermarle and SQM are the two biggest producers but they are not “pure-plays” on lithium because they have other substantial business segments. Albermarle earned 36% of its total revenue in 2018 from lithium and the remainder from products such as flame retardants and catalysts for the oil industry. SQM earned 33% of 2018 revenue from lithium and the rest from specialty fertilizers, iodine, and other products. Livent sources all revenue from lithium products, but not all of it from the high-growth battery applications. 42% of Livent’s total revenue came from energy storage; other end-products for lithium compounds include greases and polymers. The two Chinese players, Tianqi and Ganfeng, appear to be similar to Livent in terms of a 100% focus on lithium products.

The producers tend to work together via joint ventures, which is understandable given the size, scope, and complexity of lithium production projects (more on that below). Interesting note: Tianqi purchased 24% of SQM’s outstanding shares in December 2018. The timing of the investment looks particularly bad at this moment, given that SQM’s share price has been approximately cut in half since then. However, Tianqi’s reasons for acquiring the stake are probably long-term, fundamental, and strategic.

Primer on Lithium Industry

There are two primary methods of lithium extraction:

1)   Evaporation of brine. Naturally occurring, lithium-rich salt water is pumped from underground reservoirs to the surface where it evaporates to form deposits containing lithium. This is the ‘traditional’ method and has the lowest costs, but it is slow (the process takes about 18 months) and weather can affect production. The extracted deposits are processed into lithium carbonate, the primary feedstock for the battery supply chain, and other lithium compounds for end-markets such as lubricating greases and ceramics.


Lithium brine reserves are found everywhere but the majority (66%) is concentrated in South America, particularly in the ‘Lithium Triangle’ of Chile, Argentina, and Bolivia. China also has significant brine reservoirs but they tend to be remote and of poor quality, so they have not been developed.


2)   Hard-rock mining. Spodumene is the most commonly occurring lithium hard-rock mineral. Spodumene is processed into lithium hydroxide, which like lithium carbonate is a direct input into the battery supply chain. Processing is much faster from hard rocks than from brines, and spodumene has higher lithium content. However, the total production process is more expensive than for brine. Lithium hydroxide is required for long-range EV batteries.


Spodumene is found in many places but commercial mining operations are currently occurring primarily in Australia.

Although brine is the lower-cost resource, the bulk of new lithium capacity is actually coming from hard rock mines. Albermarle has stated that it will focus exclusively on its spodumene assets going forward. It has a JV with Tianqi Lithium to own and operate the Greenbushes mine in western Australia. SQM also has begun investing in spodumene in western Australia through a joint venture of its own with a local player named Kidman Resources.

Furthermore, lithium carbonate produced from brine is increasingly being converted into lithium hydroxide in order to supply longer-range EV batteries. Livent only owns brine resources but converts all of the carbonate into hydroxide. This trend indicates the producers are taking the long view of the EV market, where ‘range anxiety’ is one of the key current shortcomings that must be overcome in order for widespread adoption to occur.

Although some of the processing work is done in proximity to the brine and hard-rock resources, the downstream industry is essentially dominated by China. China currently controls about two-thirds of the global lithium cell production capacity, a figure that is estimated to grow to 73% by 2021, according to BloombergNEF. Benchmark Mineral Intelligence said it is tracking 70 lithium-ion battery megafactories under construction across four continents — 46 of which are based in China.

Risks to the Bullish Thesis

The primary risk inherent in these stocks is that they are exposed to a commodity price. I describe the industry as an oligopoly because the number of suppliers is small and the barriers to entry are high; but with respect to pricing power it actually fails the definition of oligopoly. In a mature industry perhaps the suppliers would ‘collude’ to manage prices, but for the foreseeable future this sector is just launching an all-out race to expand volume.

Demand is accelerating accordingly, which could easily swing the prices back to where they were prior to mid-2018. Ultimately, I expect the future price curve to be volatile as additional supply will probably enter the market in large discrete blocks with each large new project and/or capacity expansion that comes online.

The other main risk to the overall industry is the threat from substitute technologies. Lithium-ion has certain shortcomings for energy storage applications such as long recharge times and flammability. Alternative technologies are being developed and some are beginning commercial activity, such as hydrogen fuel cells. KPMG’s Global Automotive Executive Survey of 2017 indicated that 72% of auto executives believe that battery EVs will fail because the problem of charging time is just too important. 78% of them believe that fuel cell vehicles will be the “golden bullet” solution.

The key counterpoint to this risk is that lithium-ion has a huge head start and lots of momentum with respect to deployments in the field and charging infrastructure build-out to date. Hydrogen is just now beginning commercial activity as a transportation fuel, and its entire supply chain needs much more development and scale before it becomes an economically viable alternative. Barring a black-swan breakthrough in some other technology, the risk of lithium-ion being significantly supplanted in the near future is very low. It is a risk, but a long-term one.


ALB and LTHM are trading at particularly low valuations (trailing P/Es of 11.2x and 9.3x, respectively), so those would be good places to begin a deep-dive into company-specific analysis. If general exposure to the sector is desired, there is a lithium ETF (ticker LIT) which holds large positions in these and other companies involved throughout the supply chain.