Electric vehicle-powered lithium stocks can rise further

The rise of battery metals powered by the boom in electric vehicles has a long way to run … here’s my favourite stocks.

A plethora of pundits typically expect the global EV market to grow tenfold by 2025 and forecasts of a 50-fold increase by 2030 are not uncommon. Picture: AFP

When it comes to electric vehicles it appears a tipping point has now been reached and investors have been profiting from the tidal shift in sentiment, with Australia’s wealth of natural resources ensuring there’s no shortage of opportunities.

Earlier this year, Porsche, Audi, Skoda and VW’s Powerday presented a road map for battery and charging technology up to 2030. The VW Group had already nearly tripled deliveries of EVs in 2020 to more than 212,000 and now it intends to deliver a million EVs in 2021 and invest more than €46bn in them over the next five years.

Major competitors have responded swiftly.

General Motors recently revealed it plans to sell more than a million EVs annually by 2025 and will spend $US35bn by 2025 on development. That’s up nearly a third on the spending plan announced just on six months ago.

Not to be outdone, Ford announced in June it will spend $US30bn on EV development by 2030 and sell 1.5 million EVs that year, while aiming for 40 per cent of its global model range to be electric.

In the US President Joe Biden’s proposed infrastructure bill has set aside $US174bn to encourage EVs, with nearly $US18bn for a national charging network. A recent US government technology report, however, has suggested nearer to $US90bn will be required for the charging network to meet the government’s 2035 EV target.

Perhaps most importantly, it is this last development – a network of rapid charging stations – that will speed up EV adoption, with important demand consequences for upstream suppliers, including lithium producers.

A plethora of pundits typically expect the global EV market to grow tenfold by 2025 and forecasts of a 50-fold increase by 2030 are not uncommon. And with lithium demand for the burgeoning energy storage market demand expected to far exceed that which is required for EVs, it is reasonable to expect bright revenue prospects for lithium producers.

Demand, of course, is but one side of the equation. Currently global lithium (carbonate) production is roughly 500,000 ­tonnes per annum.

If current predictions for the 2025 EV market alone are correct, demand will exceed 2.7 million tonnes per year.

Of course, if new and recycled supply cannot meet demand, “Houston” will have a problem and the EV market will simply not reach adoption forecasts.

Australia is uniquely positioned to supply at least some of the expected demand. If currently planned Australian lithium refining capacity is achieved in the next few years it will still only double global supply to about a million tonnes.

That suggests to me the jump in the prices of lithium production stocks since my last column on the subject is anything but a bubble. A long runway of exploration, development and production is ahead, and remember this is an investment theme that is independent of economic, Covid, interest rate and inflation cycles.

New technology will also help to meet some of the projected demand with green credentials. Recently, General Motors struck a deal with Australian lithium miner Controlled Thermal Resources to extract lithium from geothermal deposits in the US. If successful, the project could deliver another 600,000 tonnes annually.

Meanwhile, Albemarle Corp, the world’s largest lithium producer, is working on a new laboratory in North Carolina to accelerate production of ultra-thin lithium foils and anodes that could double energy density and halve costs.

For context, a battery mining project only differs from other mining methods by the technology employed to remove the last few thousand parts per million of impurities. The success of battery mining projects therefore hangs on the ability, which should not be underestimated, to achieve the necessary purity economically.

Nevertheless, in the transition to green energy – as carmakers embrace the EV revolution – rising demand for lithium-ion batteries should push lithium prices up, while ensuring the supply of battery metals remains short for years. According to Macquarie Bank, a slight supply deficit this year of 2900 tonnes will rise to 20,000 tonnes in 2022 and triple to 61,000 tonnes in 2023.

Unsurprisingly, lithium and nickel prices have already risen steeply this year. Lithium carbonate is up 71 per cent year to date, lithium hydroxide has nearly doubled and the premium on nickel briquette is up 24 per cent – the highest level since late 2019 – and prices can surge further.

My team and I have been investing in companies such as Orocobre, Mineral Resources, Pilbara Minerals, Aeris and IGO. Despite substantial gains, we believe there is yet more to this story.

Roger Montgomery is founder and chief investment officer at Montgomery Investment Management.