The Lithium Bull Starts in China

Sean Brodrick By Sean Brodrick,

Metals

There is a lot going on in the energy markets post-election. One interesting development is that solar and wind stocks are getting hammered. But producers of lithium – the wonder-metal that is used for next-generation energy storage – are holding up nicely.

This might be because, when it comes to energy – especially oil and natural gas – people tend to think local. With lithium, you have to think global.

China Is the Big Dog in Lithium

That’s because the U.S. isn’t the driver of lithium demand. That’s China. And in China, spot prices for lithium carbonate are increasing steadily.

President-elect Donald Trump may not be as friendly toward green energy as the Obama administration. But the Chinese are putting the pedal to the metal as they accelerate toward the goals of their Five-Year Plan for energy (Energy 13FYP). And the rest
of the world is hurrying to catch up.

This involves massive buildups of solar and wind power. And, at least for now, lithium batteries are the cheapest, most efficient way to store that energy on a broad scale.

In fact, lithium-ion batteries made up 83% of newly announced energy storage system capacity through the third quarter of 2016. And no wonder. The cost of producing lithium storage is plummeting.

cost-of-lithium-storage-tumbles

In fact, the cost to make a lithium-ion battery has dropped more than 73% in the last 10 years.

Electric Vehicle Demand

Lithium batteries are what will power Tesla’s (Nasdaq: TSLA) new electric vehicles. So in America, we tend to focus on Tesla and its Gigafactory in Nevada as the driver of lithium demand.

Demand for Tesla’s new cars is soaring. The company now plans for battery production to reach 35 gigawatt-hours (GWh) by 2018. By the way, there are about 47 pounds of lithium in the battery pack for one Tesla Model S.

The battery packs for its new Model 3 could be different. But we do know that Tesla plans to produce 100,000 cars in 2017, then 400,000 in 2018.

That’s a lot of lithium.

Its batteries are supplied by Panasonic. Recently, Panasonic’s chief executive, Kazuhiro Tsuga, warned that the company could have problems keeping up with Tesla’s demands for lithium-ion batteries.

That means somebody else is going to have to supply that lithium. And that should mean good things for emerging lithium producers.

proposed-lithium-battery-megafactory

But the truth is, Tesla is being left in the dust. In 2015, China’s lithium-ion battery capacity tripled to 15.7 GWh. That was 70% of total global output. And that sounds like a lot.

But in the first half of 2016, Chinese companies announced they would raise production capacity of lithium-ion batteries by another 120 GWh.

The World Follows

So China is the world leader for lithium demand. But the rest of the world is racing to catch up.

Norway announced new tax breaks for EVs, along with a goal to go fully electric by 2025. Other European countries are considering similar measures.

Meanwhile, Britain rolled out a big plan to upgrade the energy grid. This includes new lithium energy storage systems. The goal is to shut down coal-fired plants by 2025.

Guess where else lithium demand is going to accelerate? The good ol’ U.S. of A. The federal government may be shifting away from clean energy, but many states are pursuing it at full speed.

In California, clean energy is a primary focus of state energy policy. This isn’t just happening on the West Coast, either.

Even in less-sunny New York, solar power has grown 750% in the past five years. Solar and wind are huge in New England.

Massachusetts just passed a law requiring utilities to procure 1,600 megawatts of offshore wind by 2027.

Rhode Island has the first commercial U.S. offshore wind project, the Block Island Wind Farm. It’s a 30-megawatt, five-turbine wind farm that will be online soon.

The fact is utility-scale solar and wind have experienced surging growth. Costs plummeted and are now competitive with other sources. They will likely keep charging ahead under a Trump administration.

And they create jobs by the tens of thousands in states like California. And in Republican states too, like Texas and Iowa.

Solar power has to be stored, and that’s where lithium comes into play.

How You Can Play This Trend

If you like the lithium space, there is an easy way to play it: the Global X Lithium ETF (NYSE: LIT).

global-lithium-etf

Looking at a chart, you can see how this fund ripped higher earlier in the year. Now it is consolidating. The next big wave is coming. I think it could take Global X Lithium ETF to $39, then potentially much higher.

This fund holds a basket of lithium producers. Top positions include FMC Corp. (NYSE: FMC), Sociedad Química y Minera De Chile SA (NYSE: SQM) and China’s LG Chem.

The Global X Lithium ETF has assets of $110.6 million and an expense ratio of 0.77%. It has average volume of 15,537 shares per day. That’s not a lot. So if you buy it, use a limit order. Don’t chase it.

Lithium is riding a surge of rising global demand. It’s big, and it’s reshaping global energy markets. This rally is going to last a long time. But don’t wait too long to grab this bull by the horns.

Good investing,

Sean