What’s the world’s most valuable commodity?
That’s a loaded question. Depending on how you’re invested and what your worldview is, your answer could be anything from gold to oil to water… or if you’re of a certain disposition, perhaps whisky and gunpowder.
I want to look at things from a different point of view. To decide what’s the most important commodity in the world, you first need to ask yourself: what do the world’s fastest growing industries need to succeed?
Perhaps a century ago it was oil, after the invention of the internal combustion engine. And maybe half a century ago it was silicon, as the microchip became a vital part of the tech industry (and after that, the world).
What is it today?
It might surprise you, but I think it could well be lithium.
The world needs lithium big time
Here’s part one of the story. If you’re reading this on a phone, tablet or laptop… you’re almost certainly using a lithium-ion battery. The last two decades have seen handheld devices, and the batteries that power them, become a major part of life.
That created major demand for lithium. It’s still a growth industry. As important as lithium batteries are… they could still be a lot better. Cheaper, more efficient and higher energy densities are the watchwords here – that’s what the energy industry is after. And the coming years are likely to see continued improvements in the efficiency of the batteries we use every day.
But that’s only part one.
Part two is a much bigger disruption. The shift to electric – and driverless – cars is happening right now. These cars need lithium to run. And they need an awful lot of it (compared to what a battery requires).
You’ve likely heard of Tesla, run by billionaire entrepreneur Elon Musk. Musk’s masterplan is to turn the way we travel on its head: by first developing high-end electric cars, using that money to produce more affordable electric cars and then to develop driverless electric cars.
A detailed analysis of the merits of this plan, as well as the second and third order effects it would have on the rest of the world, is beyond the scope of today’s note. For our purposes it’s enough to just ask: what does a company like Tesla absolutely need to stay in business?
A key part of Tesla’s business model is battery technology. A competitive electric driverless car needs to be able to run without charging for a good couple of hundred miles. To do that it needs a battery – most likely a lithium-ion one. And that means Tesla needs lithium.
Elon Musk has been explicit about this. 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.”
Tesla needs lithium to succeed. As do a great many other tech firms. But the batteries in electric vehicles use a lot more lithium than a smartphone. For instance, a Tesla Model S battery has 63 kilograms of lithium in it, the equivalent of 10,000 smartphones. That’s getting lots of people very excited about lithium. As a Deutsche Bank research note put it last year:
This is the dawn of the Lithium-ion Age
The commercialization of the lithium-ion battery in the 1990’s powered a 20- year surge in the telecommunication and computing industries following the rapid development of light, powerful, rechargeable batteries. As we enter the second half of this decade, the emergence of the Electric Vehicle (EV) is a globally significant thematic based on the same battery technology.
Governments are setting carbon emissions targets for the automotive industry whilst also subsidizing EV technology. Beyond traditional demand markets and the emergence of EV, another potential market is beginning to materialize. Battery energy storage on a grid-, industrial-, commercial- and consumer-scale is reaching commercial viability, and rapidly falling battery costs suggest that the Energy Storage sector could grow materially over the next 10 years.
Global lithium demand was 184kt in 2015, with battery demand increasing 45% YoY and accounting for 40% of global lithium demand. Based on our analysis, global lithium demand will increase to 534kt by 2025, with batteries accounting for 70% of global demand.
As The Economist put it at the start of 2016:
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 2015:
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.
Hang on, what is lithium?
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 board.
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.
Lithium producers may not be innovators… but they’re vital to the tech world’s success. Much of the modern tech industry could not exist without them. If you’re a lithium producer that puts you in a great position – some of the biggest, richest and fastest growing firms in the world have to do business with you.
Publisher, Exponential Investor