Lithium and its outlook are drawing the investors attention. The ambiguity over the demand and supply dynamics in the global market raises various concern among the investing community.
While the Department of Industry, Innovation and Science in Australia expects the spodumene production to rise in the domestic market; and Chile decides to inch up the output, worries over the oversupplied market are getting more prominent, which in turn, is capping the lithium prices in the global market.
However, despite an already oversupplied market, the global economies are placing themselves strategically in the lithium market over the forecasted lithium battery demand surge based on the assumption of high EV and Tesla’s Gigafactory penetration in the global market.
The technology adoption and innovation led by Tesla- a mammoth player in the electric vehicle segment, which underpinned the demand for lithium by reducing exposure to cobalt, gave the global economies a new viewpoint to glace over the lithium market once again.
Global economies are now positioning themselves to avoid future bottlenecks of lithium supplies. In the status quo, Bolivia- Chile’s neighbour, signed an MoU with the Rosatom State Nuclear Energy Corporation (Russia) to develop an in-situ lithium industry.
While Bolivia proceeded recently, China is securing its supply by signing offtake agreements. Now, what is striking investor’s mind is the fact that if the global market is oversupplied and is further anticipated to remain the same; why the global economies are either developing the lithium industry or securing supplies?
The predictable answer to the above question is the high EV sales anticipation in future. The sales of the electric vehicle depend upon the cost of the EV, which is estimated by many industry experts to fall in line with the cost of an internal combustion engine (ICE) over time.
In such a case, the EV holds the potential of higher penetration in the global market, and the economies are securing line for local manufacturing and domestic production, for which they would need lithium supplies until a better alternative emerges.
Not just the global-economies the lithium-based battery manufacturers and EV players such as Tesla, Volkswagen, BMW, etc., are also securing the lithium supply, while the prices remain soft.
Lithium Chemicals:
Apart from the oversupplied conditions, the falling downstream lithium-based chemical prices are also dragging the energy booster lithium down.
The battery-grade lithium carbonate prices in China are on a decline amid lower cathode and battery production, and likewise, the lithium hydroxide prices are also taking a jab in the Chinese market.
However, many industry experts believe that post a short-term downtrend, the lithium-based chemicals used in the Li-ion batteries would witness a demand surge, in which lithium hydroxide would eventually surpass the current star of the lithium chemical market- Lithium Carbonate.
But, in the status quo, the chemical producers such as the behemoth-SQM are favouring lithium carbonate over the hydroxide, while noticing the trend in the chemical market.
The vice president of SQM’s lithium and iodine business- Pablo Altimiras recently mentioned that though the hydroxide demand is growing rapidly, the market would witness a high level of carbonate demand for many years.
In our opinion, we would say that the future of the chemical market depends upon the development in the battery segment, and moreover on the technology development, which could eventually lead towards the specification of chemicals to be used in the lithium-based batteries rather than just being restricted to lithium carbonate or hydroxide.
The Silver lining:
While many investors believe that the market is presently oversupplied, few are seeing a silver lining in the oversupplied market to mitigate the opacity related to the lithium market.
The volume of the production-grade could present such a silver lining and investors should keep a close eye over it. While the market is oversupplied with lithium, the new addition to the supply is more deviating towards the non-battery grade lithium.
Investors should consider the quality of the lithium output before determining whether the market would further witness oversupply or not. While the lithium is in high production, there is a specific standard among the Tier 1 and 2 battery manufacturers, which decides if the lithium is battery-grade or non-battery grade.
The Battery Tech:
The lithium-ion batteries are efficient and an impressive development over cobalt-based batteries; however, specific issues with the lithium-based batteries such as the overheatinghave opened the room for more progress in the battery segment.
The problems associated with the lithium-ion batteries underpinned the development of other lithium-based battery chemistries such as lithium-sulfur and silicon-carbon which are presently in the development phase and yet to witness commercialisation.
Although such batteries are not yet commercially viable, the exposure to battery tech stocks has helped global ETFs to outperform the underlying lithium benchmark slightly.
One such ETF is the Global X Lithium & Battery Tech ETF, which has slightly outperformed its underlying Soloactive Global Lithium Index, which is a semi-annually adjusted index denominated in U.S. Dollars.
The benchmark index tracks the performance of the largest and most liquid lithium stocks globally, and it also includes some of the popular ASX-listed names such as Altura Mining Limited (ASX: AJM) and Galaxy Resources Limited (ASX: GXY).
Global X Lithium & Battery Tech ETFs Vs Soloactive Lithium Index:
Global X Lithium & Battery Tech ETFs Vs Soloactive Lithium Index six months returns (Source: Thomson Reuters)
On comparing the total returns over the past six-months, the Global X Lithium & Battery Tech ETF delivered a return of -4.15 per cent, against the -4.85 per cent return achieved by the Soloactive Global Lithium Index, which in turn, suggest that the ETF outperformed the benchmark index.
Global X Lithium & Battery Tech ETFs Vs Soloactive Lithium Index YTD returns (Source: Thomson Reuters)
Likewise, the YTD total return from the ETF stood at -1.23 per cent, while the benchmark return stood at -1.95 per cent.
However, from 1st July 2019 to 19th July 2019, the benchmark outperformed the ETF. But an exciting observation in the chart shown below is that the total returns from both the index surpassed the median of zero recently to place themselves in the positive territory, which in turn, suggest that the lithium stocks are showing signs of slight recoveries.
Global X Lithium & Battery Tech ETFs Vs Soloactive Lithium Index QTD returns (Source: Thomson Reuters)
The previous quarter performance of the ETF is as:
One could fathom out from the above comparative charts and the price performance of the ETF, which is holding exposure to battery tech, that the exposure to the battery tech stocks could provide some diversification advantage over pure lithium stocks, and the market is currently developing an interest in such stocks.
