Why I’m Not Tipping Lithium Stocks

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Normally I prefer to write about the ideas and opportunities that I’m excited about. As the Editor of Australian Small-Cap Investigator and Revolutionary Tech Investor, I believe there’s always opportunities to make big gains somewhere on the market, no matter what the overall picture looks like.

But today I’m going to do something a little different. I’m going to highlight an area of the market I’m not tipping right now.

Why? Because I’ve been swamped by readers questioning why I’m not tipping any lithium stocks. If you’re unaware, there are a couple of junior lithium miners on the ASX that have shot up several hundred percent in the last six months.

These companies, General Mining Corp [ASX:GMM] and Pilbara Minerals [ASX:PLS], are properly riding (in my view) the good old ‘hype cycle’.

Now, it would have been nice to get into these junior lithium miners in the early stages of that hype cycle. General Mining is up 533% in the last year — 476% in last six months alone. Pilbara is up 826% in the last year. Admittedly, I missed both of these companies back in mid-2015.

But there are good reasons why I’m not tipping lithium stocks today.

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For a start, I’m a big believer in the potential for green energy technologies, as you’re well aware by now. Electric-powered and fuel cell vehicles, and renewable energy (solar, wind, wave), are all making a serious impact across the world. And I’m keeping a close eye on the companies taking advantage of these trends.

Of note is the increasing development in electric-powered vehicles. You should know about Tesla Motors [NASDAQ:TSLA] by now — the US car manufacturer that makes long range electric-powered cars. They are a market leader with this technology.

However, all major car manufacturers are now getting into electric-powered vehicles. BMW, Daimler Mercedes, GM, Ford, Nissan-Renault Alliance, and others are all working on longer range electric vehicles.

And the main energy power they use is the lithium-ion (Li-on) battery. As you’d expect, the main ingredient in the lithium-ion battery is lithium. You find Li-on batteries in most portable electronic devices too. With billions of new electric devices set to hit the market in the near future — and potentially millions of new electric cars hitting our roads — you’d expect a surge in demand. And that’s indeed what we’ve seen.

But while there is an increase in demand for Li-on batteries, there’s more than sufficient supply to meet this need. More importantly, the major lithium producers in the world can meet any demand increase with ease.

As recently reported by Bloomberg,

If all current lithium projects proceed as planned, they would deliver about 330,000 tons of lithium carbonate-equivalent by 2020, creating “a bit of an oversupplied market,” according to Citigroup.

Australia is the world’s largest lithium-producing country. The single biggest known lithium reserve in the world is ‘Greenbushes’ in WA. This mine, however, is jointly owned by two of the world’s big lithium companies, Chengdu Tianqi Industry Group (China) and Albemarle Corp [NYSE:ALB]. Tianqi owns 51% and Albemarle 49%.

These two giants control a massive chunk of the global lithium market. Other majors include Chilean Sociedad Quimica y Minera de Chile [NYSE:SQM] and FMC [NYSE:FMC].

It’s no surprise the Chinese are getting into the lithium space — after all China is the world’s biggest consumer of lithium.


Source: Global Lithium LLC
Click to enlarge

Recently, FMC confirmed to the Financial Times that it’s in discussions with many of the world’s leading carmakers in regards to the supply of lithium.

Furthermore, most car companies are looking at ways to manufacture their own lithium batteries, turning to companies like FMC, Albemarle and SQM for the material.

Mercedes Benz, for example, is investing €500 million (AU$739 million) into building their own battery factory to power their vehicles.

This follows on from Tesla’s upcoming US$1.6 billion ‘Gigafactory’ in conjunction with Panasonic to make batteries for Tesla vehicles.

This increase in demand is primarily going to be met by the world’s big lithium companies. Current ASX listed Australian companies simply won’t be able to provide enough lithium to meet the necessary supply from car companies. And the car industry is driving this hype at the moment.

While the current ASX listed lithium stocks have seen an incredible run, I think they’re in a bubble — they’re overpriced, and at the top of the hype cycle. For me, the big boys (Albemarle, SQM, FMC, Tianqi) are far too entrenched in this market — and far too capable of meeting supply — to justify investing in Aussie lithium companies.

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The real, long term beneficiaries of this lithium boom will be the big, large-cap overseas producers. However, while I don’t think lithium producers are the place to invest now, I do believe there’s an opportunity for investing in lithium battery makers. The downside of this is the bulk of the good companies in this sector are based in places like Taiwan and Japan. You can’t invest in them on the ASX.

And I’m not alone on my view here. My colleague Jason Stevenson over at Resource Speculator put out his weekly update on Friday with the title, ‘Why lithium is in major bubble territory’.

We exchanged a few emails over the weekend about lithium. And we’re both in the same camp on this one. We also agreed that, while electric cars are certainly coming, you shouldn’t neglect the surge in technology for fuel cell cars, namely hydrogen power — which companies like Mercedes, BMW, Nissan, Hyundai and Toyota are all developing.

Electric and lithium might be the story now, but I expect the bubble to burst. If you’re left holding the can, buying in at the top of the hype cycle, don’t say you weren’t warned.

Regards,

Sam Volkering,
Editor, Australian Small-Cap Investigator

About Sam Volkering

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’…

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