How to Invest In Lithium Stocks as EV Demand Grows

·7 min read

Lithium's widespread use is nothing new, but the spotlight has been on the metal as demand for it grows quickly. Although it's not a precious metal, companies have been quick to mine it because it has become a critical element in several fast-growing markets.

Demand for lithium is expected to keep increasing, driven by the battery-grade metal's use in electric vehicle production and the telecommunications industry. Lithium-ion batteries are a favored battery technology to power not just EVs but consumer electronics like cellphones, tablets and laptops due to their high efficiency and energy density.

Before investors rush to add lithium to their portfolios, here's what you need to know about the commodity and its potential:

-- Lithium demand is driven by electric vehicles.

-- Ways to invest in lithium.

-- Lack of transparency on lithium prices.

Lithium Demand Is Driven by Electric Vehicles

Lithium is mined from the earth's crust like other metals. Its unique physical properties make it very light, allowing the commodity to be used for many purposes. A large amount of lithium demand comes from its use in batteries for electric devices. But lithium's rise in popularity is due to increased demand in the electric auto industry.

As a result, the lithium market size is expected to reach $6.19 million by 2027 after growing at a compound annual growth rate of 8.1% from 2021 through 2027, according to a news release by the research firm Valuates Reports.

Lithium became an attractive resource as the cost of lithium-ion batteries dropped and the technology evolved. However, the price of lithium has increased recently due to supply chain disruptions from the pandemic and from increasing demand for the metal. Lithium prices are set to rise 50% by January 2023, according to Rystad Energy, an energy research and business intelligence company. Lithium prices are already trading at a record of $35 per kilogram in Asia and are expected to keep trending upward to $50 per kilogram in the latter half of 2022 and are expected to increase even further in 2023.

The leading EV maker, Tesla Motors Inc. (ticker: TSLA), has been ramping up its supply of lithium. In November 2021, Tesla signed a contract with Ganfeng Lithium Co. Ltd., the world's largest producer of battery-grade lithium. Earlier in 2021, Tesla applied for a patent that supports CEO Elon Musk's pledge to mine its own lithium as a way to lower the cost of manufacturing the lithium-ion batteries used in its electric vehicles, thereby driving down the overall cost of the car.

Demand for lithium has also come from China as government regulations and initiatives to significantly reduce pollution have encouraged the use of eco-friendly practices like driving electric or hybrid automobiles.

The growth of lithium demand, driven particularly by its role in electric vehicles, is anticipated to result in new lithium mining and production in more countries.

[READ: Uranium Stocks and ETFs: 5 Ways to Invest in Uranium.]

Ways to Invest in Lithium

Investors can't directly invest in lithium since it isn't traded on a stock market exchange and there isn't a futures market with individual investor access.

Long-term investors can invest in lithium producers' stocks directly and through exchange-traded funds. Stocks have more concentrated risk, while ETFs offer broad exposure and diversification. This is to say that if you're not comfortable tracking individual lithium stocks, you may want to consider a lithium-focused ETF. But for investors who are more familiar with the lithium market and have a good sense of strong lithium companies, holding lithium stocks could serve your portfolio well.

Robert Uek, co-CEO and portfolio manager at Essex Investment Management Co. in Boston, points out three ways to invest in lithium: focused ETFs; established lithium producers that have large, low-cost operations; and startup companies that have identified a low-cost lithium resource.

Uek explains that startups in this space may be a bit risky but "have significant upside opportunities if they can execute on a plan."

Uek adds: "A few of the more speculative startups might have an advantage in that they are focused on developing U.S.-based resources and production facilities which meet the desire of both the U.S. government and U.S. auto industry as a means to limit China's domination of the lithium processing industry."

[SEE: The 9 Top EV Stocks and Battery Companies]

Here is a list of lithium companies interested investors should be aware of when exploring companies that produce, refine or mine the commodity:

-- Albemarle Corp. (ALB), the world's leading lithium producer. Based in Charlotte, North Carolina, Albemarle is labeled as a "preferred global lithium partner" for its ability to scale, its geographical access to the global lithium market and its low-cost operating resources, according to a U.S. Securities and Exchange Commission filing.

-- Livent Corp. (LTHM) is another one of the more established companies in lithium technology. The company serves a variety of markets including aerospace, pharmaceuticals and industrial through its high-performance lithium products and solutions. Livent launched a proprietary lithium metal product called LIOVIX in November 2021 that can improve the performance of lithium-ion batteries while reducing manufacturing costs and maintaining environmental sustainability. Development of new technologies in this space shows there more innovation to be had in battery technology and Livent is a global leader in this space.

-- Sociedad Química y Minera de Chile (SQM) is based in Chile, where some of the world's largest lithium reserves can be found. SQM has been extracting lithium for more than two decades and is improving the process. SQM has been performing well this year, with the stock up 12% as of Jan. 18.

-- Tianqi Lithium Corp. is the largest and lowest-cost producer of lithium materials, with operations in China and Australia. Tianqi produces a wide range of lithium products including lithium hydroxide, lithium carbonate and lithium chloride. China's domestic resources are considered by some industry participants to be either lower-quality or far from downstream production sites, or both, says Michael Underhill, chief investment officer at Capital Innovations in Pewaukee, Wisconsin. Combating this, Tianqi acquired 25% of SQM in a $4.1 billion investment in December 2018.

-- The Global X Lithium & Battery Tech ETF (LIT) offers a bundle of more than 40 holdings. A majority of assets are from China, though Albemarle is one of the fund's top holdings, along with other companies that engage in lithium mining and battery production. This ETF could be a suitable asset for investors to obtain broad exposure to the lithium market.

Lack of Transparency on Lithium Prices

Because lithium is not traded publicly and given that there is only a handful of lithium producers, it can be difficult to grasp its true market value. This could be challenging for investors looking to build an investing strategy with the commodity. Investors may want to diversify with the metal, but how would they hedge against any risks?

"Lithium is certainly part of today's global economy," says Rich Messina, managing director and head of retirement at JPMorgan Chase & Co. (JPM). While investing in lithium could be a strategy to diversify a portfolio, the metal is subject to supply volatility and a relatively small sphere of investment choices, he says.

The pricing roadblocks raise concerns about the transparency around the real market value of the commodity. One clue, though, is that production seems to be limited. According to a January 2021 report by the U.S. Geological Survey, global lithium production excluding U.S. production decreased by 5% in 2020.

The only production of lithium in the U.S. comes from a brine operation in Nevada where two companies produce lithium compounds in the U.S. from a variety of domestic or imported lithium. Domestic production data was withheld because of proprietary company data, according to the report.

Traditionally, Uek says, the nature of the end markets, the types of customers and the structure of the contracts have not been very transparent for pricing.

"There are a number of independent research organizations and other entities that are trying to solve this issue, and we think that as the market grows there will be significant improvements on this front," Uek explains.

[SEE: Should You Buy Nio Stock? 3 Pros, 3 Cons.]

Takeaway

Investing in lithium could present buying opportunities as long as the investment fits in your long-term investing strategy and doesn't interfere with your risk tolerance.

Market participants are observing that lithium is a valuable commodity for its variety of uses and its anticipated demand from electric vehicles. But there are a few layers of research to understand its market value since you can't trade the commodity directly.

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