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Going long on commodities, such as market darling lithium, means shorting ingenuity. No matter what bulls believe, clever miners and technologists will generally find new supply to feed gasping demand.
Lithium is a key input for electric vehicle batteries. For the moment, substitutes are scarce. Yet, even the cheeriest analyst on the alkali metal admits to its overabundance on earth. The most recent jump in prices has come faster than they could have expected.
A decade ago, only 2 per cent of lithium went into electric car batteries. By 2025, Citigroup believes 75 per cent of it will.
In January, global EV sales, including plug-in hybrids, more than doubled. More than half were in China, the world’s largest automobile market. No wonder that share prices of US-listed miners such as Albemarle and Livent have also more than doubled over one year. Albemarle’s enterprise value is 24 times its forward ebitda, by far the priciest ever.
The price of lithium carbonate has soared 126 per cent since the end of July to almost $13,000 per tonne, according to Bloomberg data. An optimist might note that price is still only half of the five-year peak.
But according to lithium’s cost curve, today almost every producer can make a cash profit at the spot price. Last summer, half of world production did not qualify. Even if new mines and processing plants cannot open overnight, the threat of new supply is very real.
Lithium hydroxide is also used in batteries and has risen so high that all its miners are in the money. Also, extracting any lithium from the mineral spodumene, from which processing costs are higher, is becoming worthwhile. The extra supply will put a brake on fresh price rises.
A more technical factor for some traders is that lithium hydroxide now costs more than lithium carbonate, an inversion of the usual relationship. The last time they switched positions, prices for both kinds of lithium fell later on.
Equity markets have sensibly plugged into the prospects for EVs and their batteries. However, at current prices lithium investors should worry their vehicle is running low on charge.
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