The race for “white petrol”

“It is a gospel fact… that a fleet with oil fuel will have an overwhelming strategic advantage over a coal fleet.”

Those were the words of the British Navy Admiral, John Fisher, in 1902. Perhaps his point of view – that oil is a better and more efficient fuel than coal – is obvious to you now. It wasn’t at the time. Fisher was something of a visionary in his day. In fact he was known as an “oil maniac”. It was a description he liked.

The argument against oil in 1902 was actually pretty strong. We didn’t have much of it in Britain. In comparison, we had huge and ready supplies of coal. British coal could fuel British ships.

Over time, though, the advantages of using oil started to become clearer. It was more efficient, which meant boilers could be smaller and ships could run twice as far.

Admiral Fisher eventually found a powerful supporter – the First Lord Admiral of the British Navy, Winston Churchill. Churchill had decided to convert the navy to oil. He asked Fisher to oversee a Royal Commission on Oil Supply. As he told Fisher:

This liquid fuel problem has got to be solved… [It requires] the drive and enthusiasm of a big man. I want you for this, viz. to crack the nut. No one else can do it so well. Perhaps no one else can do it at all. I will put you in a position where you can crack the nut, if indeed it is crackable.

The problem, as I said, was finding a ready supply of oil. America already had more supply than Britain, but rather than look west Churchill looked east – to the Middle East and in particular to Persia (modern day Iran).

That decision had many momentous consequences. Most of them are outside the remit of Exponential Investor. One of the most important outcomes of Churchill’s decision was that it sparked a mad rush to secure oil supplies. As I’ll show you, history is repeating itself once again in today’s markets.

Churchill’s first move was to acquire a stake in an oil exploration firm in Persia. As Dan Denning wrote a few years back:

On 17 June 1914, Churchill presented the British Parliament with a bill that authorised the Admiralty to buy 51% of Anglo-Persian’s stock for £2.2 million. The bill passed by a vote of 254 to 18. Eleven days later, on 28 June, Archduke Franz Ferdinand of Austria was assassinated by the Bosnian Serb Gavrilo Princip. The Anglo- Persian Oil Company would later be renamed British Petroleum, which, as you know, is still around today.

Let’s just think about what was really happening here. This may sound predominately like a resources story – the world suddenly needed oil, which kicked off a race to find it. But why did that happen?

It was technology. In the same way that the invention of the car created a massive demand for petroleum, the technology that allowed warships to run on oil revolutionised global demand for oil. They’re both part of the same story.

Fast forward to today. The same story is repeating itself. Technology is once again at the heart of things. This time it’s petrol – and by extension oil – whose place is under threat. That’s because battery technology has advanced to the point where it’s becoming a genuinely viable alternative.

At the forefront of this is Tesla. Just a couple of weeks ago it announced its Tesla Model 3 electric car. According to reports, there have already been 400,000 pre-orders (the deposit was $1,000).

But it’s wrong to see this as just about Tesla. As one piece I read last week put it:

Chinese billionaire Jia Yueting is stepping onto Tesla’s playing field with its own electric car start-up, Faraday Future, and Apple is planning one too, by 2019. Through its Alphabet holding company, Google is also getting into the game with plans for a self-driving car.

Then you have Ford, Honda, Toyota and Nissan all investing in the technology. On top of that you have commercial vehicle companies like FedEx working on similar ideas. There were even rumours here in Britain that Dyson was working on a project (a line in a government report describing the project was published and then swiftly deleted – more on that another day perhaps).

I’ve said this before, but I’ll say it again because it sums the story up so neatly. The horseless carriage is being replaced by the petrol-less car.

That’s sparked another mad rush from the companies at the forefront of the trend. But it’s not oil they need. It’s lithium.

Lithium is a vital component in a huge number of batteries (the most common kind of battery in use is known as a lithium-ion type battery).

If you’re unfamiliar, lithium is the lightest of all metals. If you were to see it in the wild it would appear soft and silver-white, which is why it’s known as “white petrol”. It’s an alkali metal, so lithium is highly reactive and flammable.

The last time you took a plane you might have seen warnings about taking lithium batteries on planes. In fact when Boeing released the Dreamliner replacement for the 747 it was plagued with problems with its batteries. Parts of the plane catching fire were a major issue until better housings were developed. The fact lithium is reactive makes it ideal for use as the anode (positive charge) in some batteries and as the electrolyte in others.

Major innovations are coming down the line in the development of lithium vanadium batteries, which will be used in utilities, and Cambridge researchers have developed highly efficient lithium-air batteries, but so far there are few replacements of lithium in the production of rechargeable batteries.

We’ll look at that side of things another day. Right now though, let’s just consider the opportunity this is presenting. Because just as with oil a century ago, the mad race to secure large supplies of lithium is creating a major opportunity for lithium suppliers.

As The Economist put it at the start of the year:

Demand is on the up. At the moment, the main lithium-ion battery-makers are Samsung and LG of South Korea, Panasonic and Sony of Japan, and ATL of Hong Kong.

But China also has many battery-makers. Adam Collins of Liberum, another investment bank, talks of an “inflection-point” in Chinese demand for lithium salts. Its government is stepping up the promotion of lithium-ion batteries and electric vehicles, with the biggest emphasis on buses. Sales of “new energy” vehicles in China almost tripled in the first ten months of 2015 compared with the same period in 2014, to 171,000…

This major ramping up in demand has – as you’d expect – translated into a sharp increase in lithium prices. This chart tells the story – pay particular attention to the doubling in prices at the backend of last year:

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That kind of massive ramp up in price tells us a couple of things. It would say it shows signs of panic buying. The price could slide once the panic subsides. But the panic itself tells us that there are people in the market who do not want to miss the boat and are worried there won’t be enough lithium to meet demand.

Perhaps Elon Musk, founder and CEO of Tesla Motors, is one of them. As he put it, “In order to produce a half million cars per year… we would basically need to absorb the entire world’s lithium-ion production.”

That gives lithium producers a strong hand. I doubt Tesla will be able to corner the entire market. But a message like that is a signal that producers can invest in bringing new supplies online to meet the demand.

History is repeating itself. Technology is changing the way we travel. That’s having a knock-on effect on the resources we demand. First came oil and petrol, now the race is on to grab supplies of “white petrol”.

And here’s another similarity between lithium and oil (certainly oil a century ago). It’s not all that abundant. There are only a handful of places in the world we can find it. South America has more than 50% of global supplies. America and China have roughly 13% each. The rest of Asia and Europe don’t really supply any meaningful amount of lithium at all.

This situation will change, as you can imagine. Exploding demand and tight supply creates a great incentive to develop new ways of producing lithium. The market will sort that side of things out.

But right now, this spells opportunity.

In fact, one of the stocks Eoin has recommended in the Frontier Tech Investor portfolio is a direct way to play exactly this story. Sharing Eoin’s research and analysis here for free wouldn’t be fair to paying subscribers. But if you’re interested… you can get the full story on Eoin’s work here.

Category: Commodities

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