Lithium supply will outstrip demand by 2020, says expert
Mining
Mining
Investors should take care when investing in ASX-listed lithium stocks as supply catches up with demand, says resources expert Robert Swarbrick.
Lithium’s popularity has spiked on expected demand for electric car batteries. Do you see demand remaining high?
We’re seeing supply ramp up as more and more companies try and cash in on the electric vehicle hype but with so many in the market, at the end of the day there is going to be more supply than demand and the price will fall.
Projections of global lithium supply predict we will have more supply than demand by 2018 to 2020 and that will drive the price down.
Lithium companies are booming with deposits in the Congo, Australia and South America and there has been a real scramble to ramp up production. There is no rationale on a defined resource or cost of production — just that the share price is going up and in the eyes of the company that just means they can sell their stock at higher levels.
There are a lot of juniors exploring for lithium, do you think there is still room for new discoveries?
What we’re seeing at the moment is mines moving from exploration to production and as each comes online, the estimated demand for the product fills up. It will drive down the price and become too expensive to mine.
Production capacity will exceed demand and it has largely been driven by speculation and over-excitement. People have seen this as the next big thing but there is a distinct difference between finding a deposit and getting the deposit into product.
On the speculative end, people are pouring money into lithium projects to try and make a buck but they can often be projects without full backing or mining finance. These are the ones that will be the first to go as soon as the price declines — those that have higher costs of production won’t be feasible if the lithium price drops below a certain level.
What stocks are well poised to make the most of the lithium boom?
We have seen larger outfits like Pilbara Minerals (ASX:PLS) exceed of late and they have really got the timing right. They are more advanced, have done the feasibility studies and are almost financed with clear paths to production.
When you stack them up against international projects such as AVZ Minerals (ASX:AVZ) or Taruga Gold (ASX: TAR) in the Congo, it’s easy to see why they are doing so well. When you start looking abroad it is harder to get mining finance, to prove your resource and there isn’t always a clear path to sales – sovereign risk is a big player.
A lot of the time it is just speculation, it is amazing that the valuations can be so overstretched.
At the end of the day you can promote your company to all ends but until you prove you can get it out of the ground the stock isn’t worth anything.
How much further will lithium run? What can we learn from the cycles of other resources?
I think there is still further for the market to run on speculation, but when you look at the fundamentals it’s had its day.
There are so many lithium producers that there is becoming a clear oversupply. It is similar to what we saw in the iron/ore boom of 2003 to 2005. Everyone said iron-ore would last forever and ever but all that did was end up in an oversupply. Large amounts of money went into countries such as Africa’s Congo, Mongolia and Indonesia during the coal boom but most investors ended up losing all of their capital.
Everyone loves to dream about the future and gets excited at the prospect of lithium but when you put it up against solid revenue streams of traditional resources like gold or coal you see just how risky they can be.
There are predictions that we will have an oversupply as early as 2019 – with mines coming online but a lag in the mega-factories that build the batteries. Alliance Bernstein analyst Paul Gait said late last year in a report called “Lithium: the Big Short” that, though demand for lithium could double, “the lithium frenzy should all end in tears”.
What are your tips for retail investors looking to invest in lithium?
Don’t get caught up in the bubble and make sure you know what you are investing in. The biggest thing to do is to de-risk – look at how the companies are financed and how easy the resource is to turn it into a product.
At the speculative end, take the profits while you have them. If you are willing to make a 100 per cent profit and sell two days later, then it has a justifiable risk. Remember should the price start to drop, sell quickly, but if you want to hold long term you have to look at the fundamentals.
Robert Swarbrick has 15 years experience in capital and commodity markets in Australia and South East Asia. He has been involved in stockbroking and corporate advisory in Australia and previously was Managing Director of a resource-based ASX listed company with operations in South East Asia.