The importance of Lithium in 2021

Lithium is the lightest of all metals in the periodic table. Although not very rare, Lithium is a comparatively rare element. It ranks 25th in terms of abundance in the earth’s core. Lithium has got a number of industrial uses. Most of the current demand for lithium is created by battery and electronics manufacturing followed by its usage in the ceramics and glass industry. Lately, a surge in the number of electric cars and solar power units has propelled the demand of lithium up, making lithium investment a good portfolio diversifier for investors.

Lithium Market Outlook

Processing Plant at Lithium Mine

There are only a small number of companies in the lithium industry and according to Business Week, the lithium industry is an oligopoly. The current growth cycle of the lithium industry started when the demand for lithium as a component for batteries started soaring, soon after the 2008 financial crisis.

The global demand for lithium in 2020 was around 47,300 tonnes and it is expected to rise to 117,400 tonnes by 2024. Compared to this the lithium production in 2020 was around 58,800 tonnes and is expected to reach 134,700 tonnes by 2024, according to GlobalData.

2019 was not such a good year for the lithium industry, as prices in 2019 plummeted because the production of lithium went down by almost 18.2%. The reason for decline in the production of lithium was the sluggish demand of the EV sector.

From the growth perspective, 2019 may not have been good but from an investors perspective, 2019 was a rare opportunity for investing in low-priced lithium stocks. As investors like Warren Buffet say, buy low and sell high. 2019 was when the lithium prices dropped due to sluggish demand for electric vehicles, which in part was caused by the low demand in the automobile sector.

While 2019 was not such a good year, 2020 was not much different. The sluggish electric vehicle market picked up pace in 2020 but the pandemic induced recession caused the price of lithium to stay low. Thus extending the period in which the lithium investors could have taken advantage of the low prices.

The importance of Lithium in 2021

The graph shows the price movement for lithium carbonate, which is the main compound used in the production of battery grade lithium. The supply bottlenecks created due to the pandemic began to clear up by the end of 2020, causing the prices to pick up and return to previous levels. It can be seen that the price still has not recovered to pre 2020 levels but the sharp increase shows how demand is driving the prices upwards.

Future Outlook

It is expected that the production of lithium will almost triple by 2025, to almost 1.5 million tonnes. One can assume that if demand does not keep up, this will create an oversupply and it will be 2019 again. This is a skeptical line of thinking but the billions of dollars that have already been invested into the electric vehicles sector, indicate that in the next decade the demand is going to increase tenfold. So much that the supply capacity will be under pressure to keep up with rising demand.

Lithium and the electric car industry

According to GlobalData, the annual sales of electric vehicles is expected to increase from almost 3.7 million currently to over 12 million by 2024. This is over 270% growth in approximately 3 years. China is expected to play a major role in this growth, similarly, Tesla is also playing a crucial role in shaping the future of the lithium industry. According to Goldman Sachs, one unit of Tesla Model S uses more lithium than 10,000 smartphones.

The revolutionary 4680 cell design, announced by Tesla, is expected to increase lithium battery demand and reduce the cost. With other players set to enter the electric vehicle market, there is going to be an upward pressure on the demand for lithium.

Where the price of lithium finally settles, will in the end depend on how the demand and supply play out. Remember that the lithium industry is an oligopoly, which can be both a price taker and a price giver. What this means is that the lithium industry is flexible when it comes to pricing.

In 2008 for instance, the demand for lithium slumped, so the production was cut down as well. The post financial crisis era saw growth in the lithium sector and prices started rising, however by 2019 the production capacity had been increased and more lithium was being produced than was demanded and as the lithium sector slumped, the low demand, combined with high supply caused the prices to drop.

Lithium Investment - Stocks and ETFs

Lithium can be rewarding

In 2021, we are at crossroads as far as the lithium industry is concerned. Demand is expected to rapidly grow in the next decade and similarly, the supply of lithium is also expected to increase. The demand will keep an upward pressure on the price of lithium and so in the long term, say five or ten years from now, the lithium price is going to give the investors a good return if they invest now, when prices are low.

In the short term, the lithium prices are expected to be volatile. Why? Because the market is still developing. The electric vehicle industry is still in its infancy, although it has a very bright future as electric cars will eventually phase out fossil fuel-based cars but at present, there is a need to build more capacity for electric cars. This means that in the short term, the prices will remain volatile.

Long term investors can therefore take advantage of this infancy of the industry and low prices right now to invest in lithium stocks or ETFs. Since the stocks are low at the moment, they can act as investment stabilizers. Lithium stocks can be qualified as growth stocks right now, they are very low value and thus carry low risk. Investors can therefore include lithium stocks to diversify their current portfolio and add a stock that in the future will give returns many times over.

Short-term investment in lithium can be rewarding if you know the lithium industry well enough. The market is still growing, there are likely going to be innovations that will make lithium batteries more cost-effective. Such innovations will create volatility in the price and so if you can time your trades right, then short term investment can be rewarding if your risk profile allows that.

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