The disruptive world of Lithium

The long term drivers of lithium look very promising with the inevitable increase of electric vehicles (EV) given government incentives/polices, the global move to clean technology and technological advances in electric automobiles.

Lithium-ion has secured its position as the chemistry of choice for electric vehicle batteries due to being lightweight and its high level of energy storage.  In addition to this Lithium-ion battery costs are approaching the critical point where mass adoption of electric vehicle looks feasible.

With lithium batteries increasing the economic viability of electric cars, we believe the demand for lithium will significantly increase with the increasing penetration of electric cars.  Whilst this is not likely to be a short term story there is no reason why the price of lithium and investments exposed to this theme couldn’t rise ahead of this time frame.  After all the markets are meant to be forward looking!

Electrical Vehicle growth on the rise

In our view, whilst at least 50% of current demand for lithium comes from traditional uses (the production of glass, ceramics, air dehumidifiers, dyes and chemical synthesis of pharmaceuticals), increasing global demand for electric vehicles, especially driven by Chinese consumers will likely be responsible for increased lithium demand.

Types of electric vehicles

Electric vehicles can be grouped into three main categories:

Electric Vehicles (EV): are entirely electric vehicles with a main electric propulsion mechanism and possibly a smaller gasoline engine to support battery recharge or provide engine power upon battery depletion. Electric vehicles consume ~10-20 kg of lithium per vehicle.

Hybrid Electric Vehicle (HEV): are electric vehicles which combines an internal combustion engine (ICE) and electric power for propulsion. Hybrid electric vehicles consume ~0.5-2 kg of lithium per vehicle.

Plug-in Hybrid Electric Vehicles (PHEV): are electric vehicles which allow the vehicle’s battery to be recharged by plugging the vehicle into an electric system. Plug-in hybrid electric vehicles consume ~1.8-4.2 kg of lithium per vehicle.

Global electric vehicles growth over the last 5 years by type

* PHEV = plug-in hybrid electric vehicles; *BEV = battery all electric vehicles

Source: Wood McKenzie

The electric vehicle global market has grown 10 times in the past five years. This excludes Tesla’s Model 3 pre-orders of ~370,000 cars as of May 2016, which would equate to ~30% of total electric vehicles already on the road. Moreover, in 2015, China became the largest electric vehicle market in the world where ~330,000 units sold, or +343% increase over the previous year. China now aims to put another 4.5 million EVs on its roads by 2020 which equates to demand for ~44,000 to 117,000 tons of lithium over the next five years.

Global electric vehicle growth over the last 5 years by country

Source: IEA, Global EV Outlook 2016

Governments’ long-term EV targets and incentives

Another driver of Electric Vehichles is Government incentives.  Fourteen countries have committed to establishing regulatory incentives, with 13 million electric vehicles expected to be on the road by 2020. For instance, China’s electric vehicle sales are increasingly driven by government subsidies and purchasing quotas. Subsidies for commercial and passenger electric vehicles can be as high as 60% of the selling price of a commercial vehicle, or ~40% in the case of passenger vehicles.

How to gain exposure to the rise of Electrical Vehicles

One way to gain exposure in your Super Fund to the increasing demand for Lithium is via Galaxy resources.  The company is a pure lithium play and well positioned to benefit from strong Lithium fundamentals in the short term via the development and ramp up of its Mt Catlin production in Australia which should result in significant cash flow generation.

Further share price drivers for the company in the medium term is the development of its Sal de Vida mine. Galaxy is in advanced plans to develop the Sal de Vida Lithium and Potash project in Argentina which is situated in a region where Chile, Argentina and Bolivia meet and  presently accounts for 60% of global lithium productions.

Even though Galaxy Resources is selling Lithium from its mine in Mt Catlin their development project in Sal de Vida will require significant additional funding making Galaxy a high risk investment.

It’s time to power up and buy.