The Lithium Rebound
1. INTRODUCTION
In 2020, Global X Lithium & Battery Tech ETF (NYSE:LIT) rallied 126% whilst domestic lithium producers Pilbara Minerals (ASX:PLS) and Galaxy Resources (ASX:GXY) rallied 234% and 144% respectively. Lithium stocks have bottomed out after trending down for two years on a global oversupply. Demand has begun sharply rebounding on forecasts that electric vehicle (EV) sales could increase 18-fold by 2025 and new grid-scale battery capacity will increase 4-fold in 2021 as battery costs continue to fall. On the supply side, the industry has consolidated as smaller capital-poor players have exited the market, giving more room for PLS and GXY to ramp up production and achieve operating leverage.
Our in-house artificial intelligence alerted GXY as a buy at $0.72 on 22 April 2020 and PLS as a buy at $0.60 on 17 November 2020. Shares have returned 286% and 63% respectively since.
2. ACCELERATED ELECTRONIC VEHICLE ADOPTION
2.1. Tesla’s Valuation Incentivises EV Production from Others
Tesla’s (NASDAQ:TSLA) near U$800b valuation will continue to encourage incumbents and new competition to enter the EV market. Pure play EV companies, Tesla and Nio, are the 1st and 3rd largest automakers by market capitalisation globally despite collectively delivering less than 1% of all new cars sold in 2020. We expect that incumbent automakers will accelerate their EV production plans as an obvious way to create shareholder value.
Evidence of rapid share price increases resulting from accelerated EV plans include:
- Hyundai (KRX:005380) rallying 29.9% in two days after announcing that it was in talks to develop an EV with Apple (NASDAQ:APPL) on 8 January 2021
- Baidu (NASDAQ:BIDU), the “Google” of China, rallying 19.8% in the week after announcing it was entering the EV market on 7 January 2021
- General Motors (NYSE:GM), rallying 28.7% in the two weeks after it updated its company logo to signal its pivot towards an all-electric future on 8 January 2021
These material price movements demonstrate that investor enthusiasm is not limited to speculative EV start-ups but also to large incumbent automakers and technology firms who have the capacity and resources to aggressively scale up EV production. As the structural shift towards EV production accelerates, we expect demand for lithium to continually be brought forward and provide support for the underlying commodity price.
2.2. EV Demand has been Resilient to Economic Shocks
Whilst gas-powered vehicle sales continue to decline, EV sales have accelerated. In 2020, gas-powered vehicle sales declined 15% YoY, building on the 4% YoY decline experienced in 2019. Meanwhile, EV sales growth accelerated from 4% YoY in 2019 to 40% in 2020. Growth was driven by Tesla which managed to reaffirm 2020 guidance despite the global pandemic and supply chain disruptions.
Source: International Energy Agency 2021
2.3. EVs Estimated be Cheaper Than Gas Counterparts by 2024
Batteries currently account for approximately 30% of the cost of an EV. In 2020, battery prices fell 13% to $137/kWh. At $100/kWh, EVs will achieve price parity with gas counterparts. Consequently, EVs will likely be materially cheaper than their gas counterparts by 2024. Should EVs completely capture the automobile market, demand for lithium from EVs could increase 20-fold from 2020 levels.
Tesla expects cost reductions to accelerate ahead of the industry and continue to be driven by economies of scale, more efficient use of raw materials, more efficient battery production and optimisation of battery density. Its latest major promise is a U$25k EV by 2022 which would further accelerate EV market share gains and lithium demand.
Battery Cell Costs over Time. Source: Tesla 2020
3. ACCELERATED RENEWABLES TRANSITION
3.1. Why Grid-Scale Lithium Batteries Are Needed
Grid-scale batteries, which are primarily made of lithium, are essential for the global transition to renewables. A major challenge for solar and wind energy is the temporal mismatch between energy output and demand. Household electricity demand peaks in the evening when the sun is no longer shining and there may not be wind. Grid-scale batteries allow for excess output in the day to be stored and used during the night.
Source: Energy Usage 2020
South Australia installed a 100MW lithium-ion battery in late 2017, which was expanded to 150MW capacity in 2020. Electricity prices have fallen 69% since 2017, significantly outpacing other states. This encourages other jurisdictions globally to also adopt grid-scale batteries.
Source: Vale 2020
3.2. Grid-Scale Ramp Up in 2021
A significant global ramp-up in renewables is expected near term. In 2021, the US Energy Information Administration (EIA) expects new utility-scale battery storage capacity to increase four-fold. Forecasts were made before President Biden’s proposal for a $2tr clean energy plan, providing further upside opportunity for lithium.
China, the largest source of CO2 emissions, has pledged to peak emissions by 2030 and be carbon neutral by 2060. As a manufacturing intensive economy, China would be required to make a substantial investment in renewables and energy storage, supporting lithium demand.
Source: U.S. Energy Information Administration, Form EIA-860M, Preliminary Monthly Electric Generator Inventory
4. MORE FAVOURABLE SUPPLY-SIDE DYNAMICS
4.1. Industry Consolidation
Due to poor supply-demand dynamics between 2018-2020, smaller and poorly capitalised lithium producers were forced to exit the market. This enabled PLS to cheaply acquire the operations of Altura Mining for $237m in 2020 which entered voluntary administration despite trading at a $700m market capitalisation in 2017.
Independence Group (ASX:IGO) entered the lithium market in 2020 by acquiring a $1.9b stake in lithium mines in Australia owned by Tianqi Lithium (SHE:002466), the largest lithium producer globally. This follows a $776m acquisition of Kidman Resources by Wesfarmers (ASX:WES) in 2019, demonstrating an appetite to aggressively enter the lithium market through acquiring Tier 1 lithium assets or companies such as PLS and GXY.
4.2. Production Ramp Up
In response to the improving lithium market and forecasted rise in demand, PLS and GXY have begun scaling back up production. PLS expects 3Q21 shipments to be 114% higher YoY whilst GXY expects 2021 production to be 55% higher. A rapid increase in lithium prices and production volumes will boost operating leverage and bring forward profitability.
5. CONCLUSION
Structural tailwinds of EV adoption and a shift to renewables have accelerated in 2020, providing a robust medium-term outlook for lithium. As lithium battery production costs continue to fall and allow EVs and renewables to achieve complete economic superiority over fossil fuel counterparts, lithium demand will continue to exponentially increase.
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