If you are trying to find the commodity that is likely to perform the best over the next twenty years you may want to take a hard look at lithium.
Even the best case demand growth scenario for a commodity like oil would see an increase of one or two percent per year in the future. And that is the best case, it could be much worse if economic growth slows or alternative fuels are adopted faster than expected.
Lithium demand on the other hand is on the verge of an explosion that should have many years to run. As an investor it always helps to have a wind like that behind your back.
What lithium has been used for
When many of us think of lithium, we think of the Nirvana song of that name released back in 1992. For those that didn't get to enjoy the glory days of flannel shirts, Doc Martens, and grunge rock, though, they know lithium the metal, which is pretty cool in its own way.
It is so light that it will float on top of water and so soft that you can cut it with a butter knife. It is the least dense of all elements that are solid at room temperature.
These unique properties also mean it has a ton of different uses. Those include being a treatment for bipolar disorder (since the 1940s) and as a material in lubricants, ceramics and heat resistant glass. From the 1990s onwards lithium has also been an important part of cell phone, laptop, and tablet batteries.
The game changer for lithium demand is going to be the electric car.
You don't have to believe that electric cars are going to attain widespread acceptance in short order to become bullish on lithium. The number of cars sold globally every year is in excess of 70 million. Electric cars gaining just a small percentage of that will make a huge difference to total lithium demand.
The key statistic to know is that a battery for a single Tesla model S requires as much lithium as 10,000 cell phones. Therefore even a small increase in the acceptance of electric cars will have a huge impact on demand for lithium.
Goldman Sachs analysts believe that only a 1% increase in the rate of penetration of the electric car would increase total global lithium demand by 50%. I don't think that it is going out on a limb to suggest that lithium demand is going to go significantly higher in the coming years.
Can you define oligopoly?
If you are looking to find lithium your best bet is to book a flight to South America. If lithium becomes the next oil, then South America is going to be the new Saudi Arabia. According to the U.S. Geological Survey the countries with the largest percentage of the world's lithium resource are:
- Bolivia 22.7%
- Chile 18.9%
- Argentina 16.4%
- United States 13.9%
- China 13.6%
Not only does South America have the most lithium, it also has it in the form of brine (think salt lakes). While we can mine lithium from rocks in the traditional way it is much less costly to obtain it through evaporation of highly concentrated brine.
Bolivia has the most lithium, but Chile and Argentina are the biggest current producers. What's even more concentrated, though, is the companies producing it. A whopping eighty-six percent of lithium production currently comes from just four companies:
- 31% from China's Tianqi Group
- 22% from Chemical & Mining Co. of Chile (NYSE: SQM)
- 20% from Albemarle Corporation (NYSE: ALB)
- 13% from FMC Corporation (NYSE: FMC)
That my friends is what is known as an oligopoly. In addition to those four companies, another 13% of production comes from various Chinese entities. That means that only 1% of lithium production comes from everyone else.
Put simply, there aren't many ways to get exposure here to lithium production.
Owning the commodity itself is also difficult. Lithium is not listed on an exchange, instead the price is set directly with customers by the four big producers detailed above. There is essentially no spot market.
There is a lithium focused ETF named Global X Lithium ETF (NYSE: LIT). That ETF includes Chemical Mining Co of Chile, Albemarle, and FMC Corporation, none of which are pure plays on lithium given their diversified operations. It also includes electric car manufacturers like Tesla which sports a pretty optimistic valuation and whose ultimately profitability and lithium aren't necessarily related. In fact soaring lithium prices would be bad for Tesla as it is a cost.
Twenty percent of Global X is invested in FMC Corporation. That is a huge percentage of the ETF's assets, that might make you think that it means FMC provides a lot of exposure to lithium.
It doesn't. Through the first three quarters of 2015 FMC's lithium division reported income of $11.9 million. Now compare that to the $262 million FMC's agricultural division and $148 million FMC's nutritional division each reported. That would make lithium a rounding error in terms of income importance.
While there may not be a table pounding investment currently available to take advantage of lithium it is certainly a sector to keep on top of. Opportunities will reveal themselves over time.
TMFWolfpack has no position in any stocks mentioned. The Motley Fool owns shares of Albemarle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.