July 17, 2017

Breakingviews: Chinese Green Car Boom Fuels Lithium Rush

by Breakingviews

Beijing’s push for electric vehicles is driving investor interest in lithium and lithium miners. The spot price of lithium carbonate – a compound used to create car batteries – has almost trebled since 2015, and a tussle over strategic supplies might be under way. Even so, going long on lithium is no sure bet.

The Chinese government wants to clean up smoggy air and help domestic carmakers leapfrog the combustion engine to build global auto brands. Thanks to supportive policies, mainland EV sales rose 26 percent in the first half of 2017, while production was up 30 percent. Of the 100-plus EV models set to launch by 2020, half will be Chinese, according to a forecast from consultancy AlixPartners.The country thus needs hundreds of thousands of lithium-based batteries. Investors have taken note. Shares in Shenzhen-listed Tianqi Lithium, a rare pure play on lithium, are up over 90 percent this year. Acquisitions look to be in the works too; sources told Reuters Chinese PE firm GSR Capital is seeking a substantial stake in Chilean producer SQM. Chinese companies are moving to lock in supply by inking a bevy of new contracts, according to Citi mining analyst Clarke Wilkins.

They are not the only ones who suspect the commodity has strategic value. The Australian government – which recently commissioned the world’s biggest lithium-ion battery system to support renewable energy – in June announced plans to invest directly in a lithium mine for the first time. Environment and Energy Minister Josh Frydenberg said lithium is “vital” for the country.

Unfortunately it’s not easy for investors to buy in. There are no futures markets, a handful of producers control a convoluted supply chain, and private pricing mechanisms are opaque. Spot prices may only partially reflect actual demand.

Another conundrum is the disconnect between climbing commodity prices and falling battery costs. The latter dropped by around 80 percent between 2010 and 2016. Analysts say high lithium prices have yet to be passed down. A battery pack cost around $13,600 in 2016, McKinsey estimates, so batteries comprise a major part of EV’s cost. Unless new technology changes the maths, something has to give: battery prices will rise, lithium prices will fall, or profit margins for EV makers will shrink.

Lithium’s racy prices might tempt investors to speed ahead. But they must drive carefully.

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