Lithium – The Sky is the Limit
While practically all commodities have experienced notable price rallies throughout 2021, lithium has stood out as the best performer in this asset class. The base metal lithium is one of the main components in manufacturing the batteries of electric cars. Demand for the commodity has drastically increased in recent years, mainly due to the rise in the popularity of electric vehicles.
Trade finance companies that foresaw this move were able to obtain significant profits for their clients. Since March 2021, the price of lithium has approximately tripled (See Figure 1 below). Lithium has thereby outperformed all other commodities in the same period, leaving commodity analysts to question when a possible top may be reached and whether there is room for the price to surge further. As of now, price is still seeing an uptrend, coupled however with significant levels of volatility in the market.
Figure 1: Year-to-Date Price Chart of Lithium Carbonate
Lithium’s price increase is largely due to supply-side bottlenecks. The extraction process of lithium being a complicated and costly one, suppliers have struggled to provide a steady supply to match demand. Despite this price increase, buyers scramble to scoop up spot supplies, foreseeing continued increases in demand. Macro-related supply side issues due to the Covid-19 Pandemic, coupled with unforeseen rises in consumer demand, have contributed to the overwhelming need for lithium and its consequent price increase.
As of January 2022, lithium carbonate prices in China continue to experience an uptrend, which has had a ripple effect on lithium-related markets in the USA and Europe. Throughout 2022, it appears supply will continue to fall behind demand. This is mainly because demand for electric cars is predicted to continue to increase on a global scale.
In 2020, global electric car sales reached 3.1 million, while in 2021 they reached 5.6 million, a 45% increase. Notably, past performance is not an indicator of future price movement, however, as more carmakers envision plans to expand into this sector, demand for lithium is likely to set to further increase.
Massive automakers like BMW and Volkswagen aim to have half their vehicle sales be electric vehicles by 2030. The largest automaker in the world, the Japanese company Toyota, is only in its starting stages of electric vehicle implementation and aims to significantly expand its operations in this sector in the coming years.
In December 2021, S&P Global, a well-known financial information and analytics corporation, released a report predicting both supply and demand of lithium to continue to increase, along with continued discrepancies between the two. Commodity brokers are securing long-term contracts with car manufacturers to address demand. For instance, through contracts with the commodity broker Toyota Tsusho, Toyota has predicted to have its lithium demands met by 2030.
Lithium as an investment opportunity can still be considered attractive based on the outlined fundamentals. Sustainability and ESG (Environmental, Social, Governance) factors are becoming ever apparent in the eyes of consumers and investors, adding to the popularity of electric, rather than combustion engine vehicles.
Considering this, there is a high likelihood that electric vehicles and their respective producers will be subject to increases in consumer demand and investment attractiveness. The commodity finance industry continues to focus on lithium’s use case and earning potential, based on the outlined past performance data as well as future indicators of ongoing success.
- Times, Financial. “Lithium/Iron Ore: Getting It Spot Wrong.” Subscribe to Read | Financial Times, Financial Times, 29 Dec. 2021https://www.ft.com/content/10ed1d33-5751-436f-86ba-b776e713d09a?accessToken=zwAAAX5a6qgBkc8Q7R0zV1FDb9OGurd25xPQmg.MEUCICEoqV4e3j7gjGb-mvXAKviEEFy0NlL__Du-vGOcmCfKAiEAtAt-OlyYAmEiOIXpEWYGlVH0qJvqYIjXQV8IHYveJOk&sharetype=gift%3Ftoken
- MB, Fastmarkets. “Chinese Lithium Prices Rise on Tight Supply; Other Markets Follow Suit.” Chinese Lithium Prices Rise on Tight Supply; Other Markets Follow Suit | Metal Bulletin.com, https://www.metalbulletin.com/Article/4022970/Chinese-lithium-prices-rise-on-tight-supply-other-markets-follow-suit.html
- Imahashi, Rurika. “Battery Costs Rise as Lithium Demand Outstrips Supply.” Subscribe to Read | Financial Times, Financial Times, 11 Jan. 2022, https://www.ft.com/content/31870961-dee4-4b79-8dca-47e78d29b420
- Figure 1, Year-to-date Price Chart, “LITHIUM2022 DATA: 2023 Forecast: 2017-2021 Historical: Price: Quote: Chart.” Lithium | 2022 Data | 2023 Forecast | 2017-2021 Historical | Price | Quote | Chart, 2022, https://tradingeconomics.com/commodity/lithium.