(Repeats with no changes. The opinions expressed here are those
of the author, a columnist for Reuters)
By Andy Home
LONDON, June 6 (Reuters) - Lithium is shaping up to be The
Next Big Thing.
Prices are going stratospheric, junior miners are rushing to
stake claims on future supply and investment websites are
glowing red hot with speculation about the metal's prospects.
The Global X lithium fund LIT , one of the very few ways to
get in on the action has gained 25 percent over
the past three months with assets under management leaping from
$41 million to $68 million since the start of the year.
It's a far cry from the 1990s, when the U.S. Department of
Energy was selling surplus stocks and mines were closing as the
nuclear arms race wound down, reducing demand for one of the
materials used in hydrogen bombs.
But the fortunes of this most versatile of metals were
transformed in 1991 when Sony commercialised the lithium-ion
battery, now an integral part of just about every electronic
device.
Now, however, it looks set to scale even greater heights as
carmakers, led by Tesla TSLA.O , step up efforts to mass
produce electric vehicles using an enhanced version of that same
technology.
Lithium could become the key material in the coming green
revolution of storable energy.
But the lightest of metals in the periodic table is shrouded
in darkness when it comes to its pricing mechanics.
If lithium is going to become an integral part of the global
energy supply chain, its market opacity is a big problem.
WHAT'S THE PRICE?
Start with the most basic of questions. What is the price of
lithium?
More than $20,000 a tonne on the Chinese spot market for
battery grade material, according to research house CRU.
It's about $7,000 for Chinese imports of carbonate -- the
most traded form of the metal -- but only $5,000 for U.S.
imports, analysts at Macquarie Bank said.
Whichever measure you use, prices are on the up. CRU
estimates that the Chinese spot price has almost tripled from
$7,000 the middle of last year. Macquarie, meanwhile, notes that
Chinese import prices for Chinese carbonate and export prices
for hydroxide have hit record highs.
It's a bit confusing, isn't it?
There are two problems here. The first is the bewildering
number of products that can be made from lithium, ranging from
lithium stearate (industrial grease) to lithium fluoride
(aluminium smelting) to butyllithium (organic compounds).
All are normally converted for pricing into lithium
carbonate, largely used for battery manufacture.
But even then the picture is complex.
There are different types of carbonate, with lower-grade
material for the ceramics and glass industries, for instance,
while higher-grade material used in batteries. Nor are
lithium-ion batteries themselves homogenous. There are five
major types, each using a different lithium compound.
Things become even murkier because the second problem with
lithium pricing is that most trade is conducted between a small
number of producers and their customers.
There is no exchange trading, no terminal storage market and
only an extremely limited spot market.
This means that price assessments such as those from CRU and
Macquarie rely first and foremost on published trade volumes and
trade values, a statistical sleuthing exercise made more
difficult by the complexity of the lithium product chain.
The (highly variable) bottom line is that lithium pricing is
extraordinarily opaque.
OLIGOPOLY
That opacity is a direct result of the way the lithium
market is structured. Only four producers control about 85
percent of supply, Macquarie says.
Chile's SQM and U.S. companies FMC Corp (NYSE:FMC) FMC.N and
Albemarle Corp ALB.N dominate the production landscape,
extracting lithium from salt lakes in Chile and Argentina.
Albemarle also operates a brine operation in Nevada.
The fourth producer is Australia's Talison, which produces
lithium at the Greenbushes mine in Western Australia. But it is
hardly an independent, being 49 percent-owned by Albemarle and
51 percent by China's Tianqi Lithium 002466.SZ , which takes
almost all of the mine's output for processing in China.
This oligopoly poses a real challenge for Tesla, will need
about 27,000 tonnes of lithium carbonate a year to reach its
sales target of 500,000 vehicles a year by the end of 2018. That
equates to 16 percent of global consumption last year, Macquarie
estimates.
Tesla seems to be placing its faith in a new generation of
producers, signing prospective off-take agreements with Bacanora
Minerals BCN.V , owner of the Sonora project in Mexico, and
with Pure Energy Minerals PE.V , which is working on the
Clayton Valley project in Nevada.
Interestingly, in announcing these deals, both miners said
that material would be supplied at a predetermined level below
current market pricing in alignment with Tesla's goal to reduce
the cost of its batteries.
FUTURE UNCERTAIN
There is no shortage of other companies staking their claims
to profit from the expected lithium rush.
But does the world actually need more lithium?
It seems obvious that it will, given the limited number of
suppliers and the forecast rise of the electric car.
That's why prices are so strong, isn't it?
Well, not necessarily.
Macquarie Bank argues that one of the reasons the price is
so strong is because the oligopoly is running well below
capacity.
Hard production figures are difficult to come by since none
of the major operators publishes them.
But based on Australian exports of lithium concentrate,
Macquarie suggests that Talison was last year operating its
Greenbushes mine at only 60 percent of capacity.
"We believe existing producers will be forced to lift
volumes to protect market share and keep new entrants out," the
bank said in a report last week, adding that it expects prices
to peak in late-2017 and then start heading lower.
It's a sobering assessment for a metal that is creating such
a buzz in the blogosphere.
There is an obvious analogy with the rare earths mania of a
few years ago, when excitement about the demand outlook for
esoteric metals such as neodymium boosted prices only for
investor exuberance to be dashed by a realisation that there was
more than ample supply to feed that demand.
Might lithium go the same way?
Should we be worried by a future supply squeeze or is supply
already being squeezed by dominant producers?
Lithium's market dynamics are so dark it is almost
impossible to say with any degree of uncertainty.
That's a problem for investors.
It's also a big problem for the likes of Tesla, who will be
at the mercy of those market mechanics, at least until some
bright spark invents a new type of battery.
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COLUMN-Lithium - the commodity winner you can't buy: Russell
Tesla puts pedal to the metal, 500,000 cars planned in 2018
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(Editing by David Goodman)