Lithium (Li) as most of us know is the third element on the periodic table and is the least dense metal. But the practical importance of lithium stretched far beyond these seemingly trivial facts. In fact, some predict lithium could be the world's next high-value precious metal or even the replacement to current metal indices. So where is all this value derived from?
Batteries. Rechargeable and non-rechargeable batteries. The versatility, need and abundance of batteries makes lithium one of the most sought-after materials there is.
Lithium is used in non-rechargeable batteries for pacemakers and clocks. It is used in rechargeable batteries for phones, laptops, cameras, but most importantly electric vehicles.
Electric vehicles is where the primary source of growth for lithium is expected to come from, and it is without a doubt expectations are high.
Growth of EV - Merger
The growth of EV and the urge to get into the industry is highlighted through the recent announcement of the merger between European Lithium and Sizzle Acquisition. European Lithium is a mining start-up which claims to have the first fully-licensed European lithium mine in Wolfsberg, Austria. Sizzle Acquisition is a special purpose acquisition company; a blank-cheque company.
This so-called 'blank-cheque' type of merger will result in the formation of Critical Metal, which will have a market cap of $972m and will be listed on the Nasdaq.
The mine in Wolfsberg is expected to produce 10,500 tonnes of lithium per year from 2025, enough for 200,000 EVs.
This is an opportunity for Critical Metal, as it comes at a time when many European lithium mining companies are struggling, and have particularly become reliant on supply from China, who control over 60% of global lithium processing.
EV sales are at staggering levels, and supplies of lithium are not able to keep up. This is one of several reasons which is driving the prediction for a bullish lithium market.
1. Current Supply Shortages
The primary reason for high lithium valuation is shortages in supply.
Basic demand and supply logic tells us that when we have excess demand we expect prices to rise.
Current prices stand at record highs of upwards of $70,000 per tonne. This is over 8x the level seen at the start of 2021.
2. Future Demand/Supply Deficits
Current price highs are a sign of supply shortages. However, predictions are that deficits will kick in from around 2025. Annual growth is estimated to be over 20% for both supply and demand.
However, demand growths are expected to drive a wedge between demand and supply.
The gap between demand and supply in 2030 is estimated to be about 2 million metric tons of lithium carbonate equivalent, which is 5x larger than the total market in 2021. This points to the scale of the boom the lithium market is predicted to have.
With such colossal drives in demand, it is evident to see with the similar supply and demand logic, that prices will continue to rise.
Recommendation
We believe the lithium market is on a bullish trend. This is through a combination of 3 factors:
Boom in EV demand
Lithium supply shortages
Lithium demand surges
We have seen evidence of companies such as European Lithium getting ahead of the competition to take advantage of the boom as suppliers will be rewarded with lucrative prices.
We support the bullish trend argument, and are hopeful for a long-horizon position on lithium as a sustainable source of return. Therefore, we implement a buy long position on lithium, with a long-term view upwards of 3 years, as we predict the supply/demand deficit will kick in 2025. This will mean price volatility is higher around this time and so it is optimal to realise returns. However, we will re-evaluate the position given any further advancements in supply especially in Europe (the largest EV market), and also given progress of the deficit in lithium supply.
It is difficult to predict once the deficit has been passed whether lithium has much more room to rise, and so we will be wary of this, however as of now we are bullish for this market.