By Myra P. Saefong, MarketWatch
The outlook for lithium continues to shine, even as lithium-related stocks started off the year on a sour note.
Cobalt should also benefit. Both metals are key components in lithium-ion batteries, used in everything from electric vehicles to cell phones and laptops. With electric vehicle sales “growing at double-digit compound growth rates and the costs of renewable energy continuing its deflationary cost crash, the raw materials critical for the lithium-ion battery are in the early stages of a growth cycle that may continue well into the next decade,” says Chris Berry, an advisor to Lithium Americas Corp. /zigman2/quotes/206933779/composite LAC -0.76% , which recently began trading on the New York Stock Exchange.
Tesla Inc. /zigman2/quotes/203558040/composite TSLA +3.26% has started to roll out its all-electric Model 3 vehicles, while Volvo /zigman2/quotes/208939564/delayed SE:VOLV.B -0.35% last year announced plans to phase out gas-only cars and launch new electric and hybrid vehicles in 2019.
Jay Jacobs, director of research at exchange-traded fund provider Global X, believes investments in lithium miners and refiners, as well as battery producers, “provide strong exposure” to the rise of electric vehicles, given the “vast amount of lithium and batteries that will be needed.” The Global X Lithium & Battery Tech ETF /zigman2/quotes/208067690/composite LIT -0.87% climbed 59% last year.
Many lithium-related stocks, however, have recently posted declines, as production deals eased supply concerns. On Jan. 16, Toyota Tsusho, the trading arm of Toyota Motor /zigman2/quotes/200537742/composite TM -2.10% /zigman2/quotes/203803129/delayed JP:7203 +0.43% , said it will buy a stake in lithium miner Orocobre /zigman2/quotes/208428772/delayed AU:ORE +0.67% . A day later, chemical company Sociedad Química y Minera de Chile /zigman2/quotes/204649875/composite SQM -2.48% announced an agreement with a Chilean government agency that will allow it to expand its production to some 2.2 million metric tons of lithium carbonate equivalent to 2030.
The SQM deal allows it to double its production, says Sean Brodrick, senior editor at Weiss Ratings. The news has “weighed on the price of lithium, and especially stocks leveraged to the metal.”
Benchmark Mineral Intelligence’s Lithium Price Index—a weighted average of eight lithium prices—rose 29% last year, but the monthly readings appeared to flatten in the last few months of 2017.
Brodrick says the pullback in lithium stocks is overdone, with global demand expected to grow by 75,000 metric tons in the next two years, outpacing new supplies of 25,000 to 30,000 metric tons over that period.
Battery demand accounts for 40% of the lithium market, says Berry, and the consensus view is that the market will quadruple in size, with batteries accounting for 60% to 70% of demand by 2025. He doesn’t see a “structural shortage” but does “expect a tight market to 2020 at least.”
Meanwhile, cobalt suffers from a much tighter supply situation than lithium. Cobalt is at risk of “tipping into the totally unavailable category, such as cannot-get-it-for-love-or-money,” says Hallgarten mining strategist Christopher Ecclestone.
Lithium-ion batteries account for more than 50% of annual global production of cobalt and are forecast to exceed 60% by 2020, says Trent Mell, CEO of First Cobalt Corp. /zigman2/quotes/201047607/delayed CA:FCC -1.61% /zigman2/quotes/207051042/delayed FTSSF -3.77% .
About 60% of production comes from war-torn Democratic Republic of the Congo, he says, and cobalt is “very much a byproduct metal,” with 98% coming from copper and nickel mines. While his company is exploring new sources, he says, “it will take years to bring any new discovery into production.”
In China, prices for cobalt sulphate, a major feedstock for the battery industry, rose 78% in 2017, according to Benchmark Mineral Intelligence analyst Caspar Rawles. “As with lithium, the price rises in cobalt have been driven by a lack of raw materials,” he says. “We are still really in the early stages of this growth in battery demand.”