Lithium industry – Primer

By Bolivia Económica

Executive Summary
The rising demand for lithium-ion batteries used in Electric Vehicles (EVs) and rechargeable batteries is substantially increasing the demand for lithium. Indeed, securing the supply of lithium is increasingly becoming a top priority for technology and automotive companies in the US, Asia and Europe. As such, many technological and auto players enter in strategic alliances or joint-ventures with exploration companies to establish and secure a reliable, diversified supply stream of lithium.

These investments have favoured the economics of early-entrants as prices for lithium remained high thanks to tight supply, but the continuous investment and need from these end-market players has increased the pipeline of projects under development worldwide. This is expected to bring down the price of lithium (Lithium Carbonate price stood at over $13,000/t) in due course.

Going forward, the EV sales penetration of global vehicle sales will be a key driver for demand of lithium. As such, we expect to see more vertical investments to secure adequate supply. This, in turn, will represent a boom for emerging countries, particularly in the Latin American region, where 51% of lithium resources can be found, representing an estimated $356bn of revenues (cf. exhibit 3) if all resources were to be extracted.

Market Overview
Lithium is a light metal, highly reactive and flammable that can be found within minerals and salts. Lithium compounds are being used as the electrolyte in rechargeable batteries and is also very much in demand for its application in electric vehicles (EVs). Lithium is also widely used in glass and ceramic manufacture, aluminium smelting and lubricated greases.

Exhibit 1Lithiumexhibit1

Lithium is primarily extracted from brines and hard rock and because they have different extraction techniques, they also have different investment and return profile. Generally, brine extraction requires a higher initial capital-investment than hard rock sources. The latter also benefits from shorter lead times to bring deposits to production, which reduces risks.

The lithium from brines is extracted by pumping the brine to surface before it is processed in a chemical plant to produce lithium carbonate (Li2CO3), which can then be commercialised. On the other hand, the hard-rock deposits are processed to a concentrate that may be converted to lithium carbonate or lithium hydroxide.

These two sources are primarily found in the American continent, China and Australia, where the concentration of reserves and market participants are located. According to some estimates, total lithium resources amounted to more than 53 million tons in 2017 thanks to continued exploration, while reserves are estimated to be around 16 million tons in 2017. Worldwide lithium production stood at around 44 thousand tons in 2017.

Exhibit 2

Regarding the monetary value, we estimate that global resources value (in Li2CO3 terms)  amounted to around $700bn, while just under 30% is currently expected to be viable for extraction, meaning there remains a great opportunity to realise value for investors in the sector.

Exhibit 3

Geography Resources value ($bn) % of world
Latin America 355.9 51.3%
China 91.0 13.1%
North America (USMCA) 115.4 16.6%
Russia 13.0 1.9%
Europe 31.1 4.5%
Australia 65.0 9.4%
Africa 22.1 3.2%
Source: USGS & Bolivia Económica, Lithium px = 13,000

Latin America represents a huge concentration of lithium as a resource and reserves, the latter representing ca. 61% of global reserves. Of note, Bolivia does not feature in those reserves statistics as of year-end 2017.

Exhibit 4

Furthermore, it is important to note that actual global supply of lithium product is over 80% sourced from: Albermale (USA), SQM (Chile), FMC (USA), and Sichuan Tianqi (China) with main fields located in Chile, Australia, Argentina and China. New entrants are expected to dilute this concentration to 50% in the coming years.

Risk factor:
The key risks for resources investments include:
1) Commodity price volatility: Unlike other well-developed commodities market, the price of lithium is generally determined by private negotiation between producers and end-users, generally denominated in USD.

Exhibit 5
Spot Lithium Carbonate and Lithium Hydroxide prices (USD t)

2) Funding: Projects can require significant capital and any delays has a cost implication. Thus, there is often a need for access to adequate debt and equity funding, as project profitability may be impacted by a downturn in commodity prices.

3) Ability to operate: Much of the resources tend to be located in jurisdictions with a history of political volatility, as well as in remote areas that can be affected by many factors, including weather impact.