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Is the Lithium Market Hiding Big Risks?

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Lithium is one of the bright spots in global mining industry. The popularity of electric cars is expected to help grow global lithium demand by 5.8% per year until 2018 and 9% to 10% per year from 2019 until 2025. Taken at face value, these high growth rates suggest rising prices and a booming market. It looks like supply may grow quicker than demand, though.

Some forecasts project that the supply of lithium may exceed demand by 72% in 2018. In the market for chemical-grade lithium, assuming that all pipeline projects are cancelled then the market could still be oversupplied by 28% in 2018. The numbers are only estimates, but they show that the market could easily become very strongly oversupplied in the medium term. As demand picks up after 2018 the situation should improve, but miners could suffer in the meantime.

Lithium miners 101
Lithium used to be only one of Rockwood Holdings'  (NYSE: ROC.DL  ) many segments, but after a number of divestments lithium is now a major part of the company. In 2013, it contributed 56% of the company's adjusted EBITDA. Rockwood Holdings is a large producer of lithium with operations across the Americas and a pending acquisition in Australia.

Rockwood Holding's other segment is its metal surface treatment business. With a mix of customers in the automotive space, aerospace industry, and general industry, this segment will help decrease the impact of volatility in the lithium market. Rockwood's debt load is low with a total debt-to-equity ratio of 0.45. A downturn in the lithium market would be traumatic, but this is an established producer that is in it for the long haul.

Sociedad Quimica y Minera  (NYSE: SQM  ) is a big Chilean miner that sells lithium, iodine, potassium chloride, and a number of other products. Lithium is only a portion of its business, accounting for 9% of its 2013 revenue. The recent instability in the potash market is a big issue for Sociedad Quimica y Minera. The fall in potash prices has helped push the company's expected 2014 EPS of $1.49 far below the $2.47 EPS it posted in 2012.

There are also big governance issues. A Chilean regulator charged Julio Ponce with violating laws related to restrictions on anonymous organizations' abilities to influence stock prices in ways that go against the public interest. Seeing as he is the chairman of the board of directors of Sociedad Quimica y Minera, this is a big issue. Investing in a Latin American miner with a history of using shell companies to manipulate stock prices is risky to say the least.

FMC  (NYSE: FMC  ) is an exciting play in the lithium mining world. The company is in the process of splitting in two. It will put its lithium and alkali chemicals operations in a new company called FMC Minerals. Its agricultural, health, and nutrition segments will go into the new FMC. The company is not expected to be split until early 2015.

For U.S.-focused investors, the new FMC minerals is a good company to watch. University of Wyoming researchers recently found a large lithium deposit that has the possibility to contain $500 billion of lithium at April 2013 prices. This deposit is still being explored, but FMC has already applied for leases in the area.

FMC Minerals will not be a huge miner. Its mineral segment's 2013 revenue was just $970 million. It will be a good lithium play in spite of this, as lithium comprised 23% of its 2013 mineral sales.

A less volatile investment
Energizer Holdings (NYSE: ENR  ) sells one of the world's best known battery brands with its Energizer Bunny. Its household products segment includes both its battery products and lighting products and made up 45% of its 2013 global net sales. Energizer should not have a difficult time expanding during the next six years as the global battery market expected to grow around 14% per year from 2010 to 2020.

In 28 of the 31 markets Nielsen measures, Energizer is already the first or second brand by market share. Another plus for Energizer Holdings is that a well-supplied lithium market means little cost inflation.

Be cautious and careful
Lithium is all the rage, and there is the distinct possibility that it may become oversupplied in the near future. The upside is that this will create good buying opportunities for Rockwood Holdings and the coming FMC Minerals. For a more stable play on lithium and batteries, the well-known Energizer Holdings is a good company to consider.

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Joshua Bondy

Joshua Bondy works in the energy and materials sector. He works hard to bring to light the underlying forces that drive prices and move the market.

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