I think if you sat most growth orientated investors down and talked to them about the big industry move that will change everything in the next few years, they’d probably very quickly get to the prospects of a new electric grid, boasting all manner of electric cars and so forth. Certainly Tesla will be stoking this excitable talk today at its conference! The Economist for instance has an excellent focus on the subject of EV transportation this week which contains lots of thematic rapture.

But there’s also a strange jarring cognitive dissonance at work. We all may be getting terrifically excited about our electric battery future, but not much of this is showing up in the price of lithium. To put it bluntly, investing in lithium has been a bit of a damp squib.

Last week alternative assets specialist Ocean Wall put out a fab report on Lithium which I will be drawing on for a future Financial Times column. It recognises this cognitive dissonance – all the charts on the demand side point upwards but the price doesn’t seem to be using the same chart !

Before we get to Ocean Wall’s excellent report, let’s start with an active investor in this space and gauge their outlook. Specialist hedge fund Westbeck Capital is hugely experienced in e battery space and has a dedicated active long short fund called the Westbeck Volta fund. Here’s their latest market over view on the positive side.

EV sales are strong on an absolute, relative (to ICE), and comparative to last year basis is well documented, but wearables and e-bike sales have also been robust so far this year, broadening the use of rechargeable batteries. Europe has become the major market for EVs, outselling China in the first half of the year (according to BNEF). This has been helped by subsidies in the near-term, but with a raft of new models coming to market over the medium term and more low cost models likely, we believe that we will start to see fundamental demand for EVs in the medium term. Sales in Germany recorded a 13% market share in August, and Berlin intends to levy a CO2 tax on fuel shortly, while capping household energy pricing. The increased numbers currently working from home has also supported laptop and tablet demand and there are anecdotal reports of increased demand for cordless power tools. E-bike demand continues to be strong both from commuter and leisure users and we expect will also be bolstered by the growth in the various urban based hire schemes, as and when workers return to cities.”

I caught up with will Smith from Westbeck only yesterday and here’s his take on the low prices for Lithium – “Clearly there was inventory at the mine gate, the convertor, refinery and the battery makers, but just how much is hard to know. Speaking to convertors and miners recently, we note that demand is up and the friction of trade-letters of credit, shipping dates- has eased. Prices have not budged, but the demand pull will, we think, soon have an effect on prices. The battery manufacturers themselves are very busy, and with the spot price gouging in to the cost curve, any increase in production has to be incentivised by much higher prices. Some upward movement by year end we think.”

So, Westbeck seems to think there is potential for the lithium price, both carbonate and hydroxide, to appreciate sharply and they are maintaining their overweight stance on the lithium producers.

Biggest holdings Westbeck Volta Fund

IFX GY Infineon Technologies 8.9%

CREE US Cree Inc 6.8%

LTHM US Livent Corp 6.1%

FM CN First Quantum Minerals 5.3%

PLS AU Pilbara Minerals 5.0%

Which brings us nicely to Ocean Wall’s very readable primer on the Lithium space – The case for Lithium.

First the inescapable (dismal) facts on the ground – Lithium prices have continued their 2-year bear swoon throughout 2020 and the benchmark Fastmarket prices are currently at $7,250 per ton for Lithium Carbonate and $9,400 per ton for Lithium Hydroxide.

The Ocean Wall report observes that back in 2019 Goldman Sachs attempted to call the bottom and suggested that falls from the levels then of $9,000/t and $11,000/t would result in a significant contraction in supply as marginal producers ceased production.

Things haven’t quite worked out that way.

I’ve had a good read through the Ocean Wall report and I think it contains a bunch of really interesting insights.

I’d highlight the following insights and observations in no particular order of importance:

Choose your lithium carefully – There are two main sources, with the largest supply coming from  Lithium Brines – dissolved Lithium – with output very geographically concentrated in the Lithium triangle Chile, Argentina and Bolivia. The other main source is hard rock mining which is more geographically more distributed – its cheaper to produce but mines get to charge less and thus it boasts a lower margin. “Lithium production to date has been focussed on the relatively easy to store and transport Lithium Carbonate, however as battery technology advances the increased demand is emerging as being for Lithium Hydroxide hence the significantly higher price.”

Where are the Lithium resources?  in descending order, Bolivia, 21 million tons; Argentina, 17 million tons; Chile, 9 million tons; Australia, 6.3 million tons; China, 4.5 million tons. Australia has the largest percentage of current lithium production, but is the country using the largest percentage of its reserves. But bear in mind that we won’t ever run out of Lithium as it is widely available, assuming the price is right ! And Cobalt ? Most cobalt in the DRC comes from an area known as the Copperbelt. It holds one-third of global cobalt reserves and accounts for 40 to 50 percent of cobalt output in the DRC.

Lithium recycling for more sustainable supplies? There is also the potential for recycling, common in other metal complexes but the extraction of lithium from old batteries is approximately 5x more expensive than mined lithium. “Tesla supposedly recycles all of its produced batteries, through a vast network of partners around the world. Tesla wishes to close the loop and recycle all the batteries it produces in house and is developing a unique battery recycling system at its Nevada Gigafactory. A Finnish company, Fortum, announced it has reached a recycling rate of 80 percent for EV batteries, using a hydrometallurgical recycling process. It will be the first company in Europe to offer industrial scale hydrometallurgical process for recovering cobalt, manganese, nickel and lithium….Canadian Li-Cycle can achieve a recycling rate of 80 to 100% of materials in LIB’s, the company claims. Summit Nanotech designed an innovative new extraction method to generate battery grade Lithium Carbonate or Lithium Hydroxide direct from brine sustainably”.

Big advances? Not many truly revolutionary ones in truth although prices do keep falling. According to Ocean Wall “Most of the recent advances in lithium-ion energy density have come from manipulating the relative quantities of materials such as cobalt, manganese, nickel and aluminium in cathodes”. New materials ? “The shift towards high-nickel cathode materials, to increase battery energy density, is accelerating demand growth for lithium hydroxide, though its cost premium over lithium carbonate has made some consumers reluctant to switch feedstock. Lithium hydroxide is expected to become the dominant lithium chemistry consumed …To increase EV range, producers are switching to higher nickel content battery’s, which require lithium hydroxide due to temperature restrictions of lithium carbonate during manufacture“.

Spoiler alert 1 : Unlike other metals used to make electric cars such as copper, there is currently no traded price for lithium.

But Lithium spotprices have been falling, steadily. “ Spot prices in China have dropped double digits due to uncertainty around the country’s electric vehicle subsidies….Global uncertainty from the U.S.-China trade war, reduction in Chinese EV subsidies thus a reduction in EV sales in China, consumers reducing lithium inventories, along with introduction of new supply has seen a gradual correction in the lithium market over the past 18 months…Despite this the majority of new chemical projects have been slow to deliver, share prices and investor sentiment remain tied to short-term price trends rather than underlying market fundamentals. This was before coronavirus disrupted the economy and may put lithium under pressure due to fears of a protracted recession. President Donald Trump’s aggressive stance against China may result in a shift away from Chinese sources of lithium, potentially increasing prices.

What went wrong? “After expecting an EV boom, there has been overinvestment in lithium supply, slashing prices of lithium carbonate. But battery packs are actually less sensitive to the prices of commodity materials than typically assumed – instead, much of the cost comes from manufacturing inefficiencies.

Spoiler alert 2 ! Despite the hype about Tesla electric cars accounted for 2.6% of global car sales and around 1% of global car stock in 2019”.

Mines to watch ? “Greenbushes is the world’s biggest hard rock lithium mine. Albemarle, which holds a 49% stake in Talison, is planning a lithium hydroxide manufacturing plant, outside of Greenbushes, capable of producing up to 100,000 tonnes per year of lithium hydroxide monohydrate from five 20,000 tonnes per year process trains and up to 1.1-million tonnes a year of tailings. China’s Tianqi, which has a 51% interest in Talison, is constructing a 24 000 t/y lithium hydroxide plant in Kwinana, just 40 km from Perth”.

So, what happens next to Lithium prices? Probably another year of low prices, reckons Ocean Wall.

 Although demand will undeniably increase, the supply surplus is likely to continue for the near future (3-5 years)…….Despite this outlook of the lithium market in the near future, the increase in production facilities still require investment. This may lead to investment opportunities in the market. We foresee any downtrend in prices as being short lived as lithium will play a central role in future technologies over the next ten years.”