BY: STEPHEN BARRY
With climate change becoming a more pressing international issue, some investors are concerned about the profitability of the global petroleum industry; those investors hoping for strong returns on their capital should consider the potential of lithium. Although traditional commodity markets have recovered from the low prices of February, with barrels floating between $40-50, it is unlikely that crude oil will again reach the peak prices of 2008, when the value went north of $100. The petroleum energy market is doubtful to hit such highs again, facing downward pressure for a variety of reasons; increased competition as shale oil becomes more cost-effective, the inability of OPEC to deliver on bringing Russia to the table with a sustainable production cut, as well as a shift toward greener energy sources with national commitments to cut carbon emissions. In light of these concerns, forward thinking investors should instead look to lithium as the driver of future commodity markets.
Lithium, sometimes referred to as “white petroleum,” is the world’s lightest metal. For most of the past century, it was used primarily for ceramics, glass, and machine lubrication, until it’s potential for energy was discovered. Now, lithium is used as a small but critical element of battery production. Compared to traditional alkaline batteries, lithium-based batteries are capable of storing more energy, charge faster, and the low-weight nature of these batteries has made them the standard choice for smart phone manufacturers. Lithium batteries are also used to power electric cars, and are seen as an attractive alternative power source to oil, with solar panels using lithium to store energy. Lithium’s role as a greener means of energy has been a key aspect of its attraction as an alternative fuel source, with a December 2015 report published by Goldman Sachs stating lithium “will be a key enabler of the electric car revolution and replace gasoline as the primary source of transportation fuel.”
Goldman Sachs is not the only company to see lithium’s potential; Tesla has been the company at the forefront of lithium’s rise. The tech giant has been investing heavily in lithium, at one point considering an acquisition of Simbol, a venture-capital start up based on lithium. While this purchase did not come to fruition, Elon Musk, the company’s founder and CEO, has aimed for vertical integration of its raw materials, in particular lithium. Tesla’s ambitions to put 500,000 electric vehicles on the road by 2020, is driving the company to try to secure its necessary resources. To complement this production push, Elon Musk has announced plans to develop a “Gigafactory” to mass produce lithium batteries. This Gigafactory will push demand for lithium, and ensure growth in the commodity market.
While at the moment the market is relatively small, the scale of growth is massive, with some analysts predicting global lithium trade to triple by 2025. In addition to Tesla, China has also worked to secure lithium for its lucrative industries like smart phone and solar panel manufacturing. Furthermore, climate commitments and efforts to curb pollution, are moving China to invest in lithium batteries as a green alternative. Like Tesla’s Gigafactory, China seeks to develop lithium batteries by economy of scale to keep them cost effective. Part of the issue is that lithium is a scarce metal, with the major lithium reserves concentrated in several regions of the world; the Tibetan region of China, Australia, and the salt flats that border Chile, Bolivia and Argentina. In South America, the Salar, is considered a prime source of lithium, with some estimates saying it holds 70% of the world’s reserves. China has invested in several pilot plants, such as one in Bolivia, and is working to industrialize the extraction process. Securing access to lithium is critical for companies whose products rely on lithium batteries.
While the lithium commodity market shows great potential, investors should also be aware of the risks that are associated with this rapidly growing market. Lithium prices are high, and despite strong demand, they will likely remain high due to the difficulty of the extraction and refinery processes. Lithium extraction is time consuming, with the distillation of the metal from other compounds coming from an intense evaporation technique. Problems of extracting and isolating lithium are compounded by the limited number of producers, putting the industry at risk of a global bottleneck in supply. Additionally, the South American nations where lithium resides, such as Bolivia, have a history of nationalization of natural resources and an antagonistic attitude toward foreign investment. Another concern is that an alternative to the lithium battery, one that is either cheaper to produce or more powerful, will crowd lithium-ions out of the industry. However, even if new technology is developed, there is a catch-up curve to become commercially viable, and longer for it to become industry standard and cost-effective.
Lithium will be the commodity that drives the future of energy markets. Lithium batteries have huge potential as a green alternative to oil driven energy sources. Lithium battery dependent goods, such as smart phones and electric cars will also increase global demand. With industry giants like Tesla, as well as Chinese companies, working to develop the nascent extraction industry, investors can be certain that the future of commodities lies in lithium.
Stephen Barry is a writer with an interest in ideas. He graduated from New York University’s School of Professional Studies with a Masters in Global Affairs. His writing focuses on issues of geopolitics, literature, and art.
Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.