Lithium has multiple applications from consumer to military. But investors should be wary of lithium’s delicate supply and demand levels before diving into this stock.
What is Lithium?
Lithium is a chemical element on the periodic table. This metal is soft and white, giving it the nickname “white petroleum.” While lithium has been traditionally used in ceramic and glass production, it’s now more popularly used in rechargeable batteries in smartphones, laptops and electric cars.
Lithium also strengthens other metals. For example, lithium alloys, such as aluminum-lithium, are used in bicycle frames and aircrafts. And in the pharmaceutical industry, lithium is used to balance neurotransmitters in the brain to treat bipolar disorder.
Chile, Australia and Argentina are the three largest lithium producers in the world, according to a 2020 US Geological Survey.
Trajectory of the lithium market
There are two main ways to invest in lithium: lithium producers and companies that rely on lithium as a raw material.
Companies that produce lithium can either mine hard rock or harvest lithium-brine deposits. Mining removes lithium from a mineral using a drill, while harvesting brine deposits extracts lithium that has dissolved in groundwater through evaporation. The brine technique takes approximately 18 months, which is slower than traditional mining.
On the other hand, companies that use lithium generally focus on lithium-ion batteries and devices. For example, electric vehicles rely on lithium as the basis for its green technology. So price fluctuations and changes in the lithium market can directly affect company stocks that use lithium as a raw material.
The world is progressively more technology-driven. Rechargeable lithium-ion (Li-ion) batteries have multiple applications — from consumer smartphones and laptops to military voice and data radios. Lithium plays an essential role across mobile technologies, with the demand for lithium-ion batteries poised to triple by 2025, according to an analysis by S&P Global.
The value of the global lithium market stood at $4.3 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 1.9% from 2020 to 2027, according to a report by Grand View Research.
And as the global market for electric vehicles grows, the annual lithium demand for batteries is expected to skyrocket. According to Global EV Outlook’s technology report from June 2020, the global electric vehicle stock is set to grow by 36% every year, totaling 245 million vehicles by 2030 — or 30 times more than in 2020. An analysis by IBIS World found that annualized market size growth for lithium battery manufacturing in the US alone between 2015 and 2020 was 3.1%.
But market trends may slow the lithium sector down in coming years. The rise in production has contributed to falling prices, according to S&P Global. This raises concern that enthusiasm over investment in lithium will drop too.
Prices dropped sharply in 2019 in response to oversupply and a slow growth in electric vehicles. Coupled with volatility sparked by COVID-19, these scenarios are causing some investors to approach lithium with caution.
But others are more optimistic. An analysis by Roskill notes that declining electric vehicle sales in China — its biggest market —during the second half of 2019 and a global drop in sales due to COVID-19 have merely put a “short-term break” in lithium demand growth. The firm projects it to grow to 1.0Mt LCE in 2027.
Why invest in lithium stocks?
The world is progressively more technology-driven. Rechargeable lithium-ion (Li-ion) batteries have multiple applications — from consumer smartphones and laptops to military voice and data radios. Lithium plays an essential role across mobile technologies, with the demand for lithium-ion batteries set to triple by 2025, according to S&P Global.
And as the global market for electric vehicles grows, the annual lithium demand for batteries is expected to skyrocket. According to Global EV Outlook’s technology report from June 2020, the global electric vehicle stock is set to grow by 36% every year, totaling 245 million vehicles by 2030 — or 30 times more than in 2020.
Risks of investing in lithium
Although the demand for lithium is soaring, lithium stocks have been drowning in a surge of new lithium producers from Chile, Argentina and Australia. When supply grows faster than the demand, it can trigger a sharp price drop and cause stocks to become undervalued.
Lithium-ion batteries also require cobalt to produce. Unfortunately, two-thirds of the world’s cobalt is mined in the Democratic Republic of Congo, making its supply susceptible to political instability. And since global cobalt mine supplies are also at risk to disappear in 2020, there may not be enough cobalt to manufacture these batteries.
And it doesn’t help that there’s no benchmark price for lithium. So investors can only base the value of the industry on a handful of companies. You’re flying blind without a full sense of the global market, leaving investors and banks struggling to manage risk.
You can invest in lithium stocks by purchasing shares of a specialty chemical company that produces lithium or a business that uses lithium technology. Select a company to learn more about what they do and how their stock performs, including market capitalization, the price-to-earnings (P/E) ratio, price/earnings-to-growth (PEG) ratio and dividend yield. While this list includes a selection of the most well-known and popular stocks, it doesn't include every stock available.
What ETFs track the lithium category?
Some ETFs follow the full lithium cycle from mining through battery production, while others specialize in the battery industry.
- Global X Lithium & Battery Tech ETF (LIT)
- First Trust Nasdaq Clean Edge Smart Green Energy ETF (QCLN)
- Amplify Advanced Battery Metals and Materials ETF (BATT)
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We can find lithium products in our everyday lives. The increasing demand for lithium-ion batteries in mobile devices and electric vehicles keeps this stock on investors’ radars.
But to invest in lithium, you’ll need a brokerage account. Weigh a few trading platforms to find a brokerage firm that best fits your investing needs.
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