Lithium battery zoom with electric cars

2021 BMW iX electric car. Picture: Supplied

Electric cars are on a roll again: A rising market and a change in US politics means production is ramping up and with that lift comes a new rush on Australian lithium stocks.

Lithium is a key component in electric car batteries: No wonder Australian investors are moving in again on the likes of Pilbara Minerals (PLS), Orocobre (ORE) and Galaxy Resources (GXY) which have all shot ahead by between 50 to 80 per cent. An important qualifier is that lithium stocks have very different risk profiles.

In late September investors took notice of lithium when to much fanfare, the US based and ASX listed Piedmont Lithium (PLL) reached a deal to supply Tesla. Its stock went from 9c to 66c. It’s now back to 39c.

The key takeout is that Piedmont’s North Carolina project is not advanced, while the stocks listed above are all in production, hence there is less uncertainty and they’re in a better position to benefit from rising battery demand.

The EV boom is particularly strong in Europe, where there are mandates that new petrol vehicles cease production at a certain date.

In February, I promoted owning Pilbara Minerals and Orocobre, the main reason being the exposure gained to one of the two key inputs (the other being nickel) in rechargeable batteries that are required by the growing numbers of electric vehicles.

Why are the stock prices climbing so quickly? The Tesla deal caused investors to take notice of the all-important supply and demand equation for the periodic table’s lightest metal.

Investors are once again taking notice of the fundamentals. On current estimates of EV production, the supply of lithium needs to increase exponentially over the next decade to keep up with demand. Current levels are 300,000 tonnes a year (tpa) of Lithium Carbonate Equivalent (LCE), while 900,000tpa should be required in 2025. This climbs to 2 million tonnes a year (2mtpa) LCE in 2030, 3.5mtpa in 2035 and over 5mtpa LCE in 2040.

On the supply side, marginal projects, or those with too much debt, have fallen by the wayside as lithium prices fell, owing to short-term oversupply.

But COVID-19 further reduced lithium supply as a further layer of uncertainty was added.

It has also become difficult to finance new projects, partly because unlike some commodities, it is very difficult to ramp up lithium production to meet increasing demand because of the complexity of the extraction process.

Another key is that no one wants to be reliant on China anymore.

Speculation in the past few months from Tesla’s Elon Musk about creating his own lithium supply channel underscores supply chain fears.

Politicians and executives of car manufacturers are actively seeking to reduce and even cut reliance on the giant Chinese battery manufacturers.

In sum, demand for EVs is only going to climb, but there is a risk that lithium production may struggle to match.

A structural deficit and significantly higher prices could loom as early as 2022 and by 2025 at the latest.

The lithium boat is leaving and investors don’t want to miss it.

The good news is that we continue to believe there is value in the stocks I presented earlier this year.

Richard Hemming is an independent analyst who edits undertheradarreport.com.au