Chronicle Journal: Finance

Lithium Is an Energy Commodity: Will EVs like Tesla Push it Higher?

2020 was the year of electric vehicles. The excitement over the industry drove stocks of EVs higher last year. One of the main components of their batteries is lithium, a commodity. Will EVs drive up the price of lithium and benefit stocks such as Sociedad Quimica y Minera S.A. (SQM) and Albemarle Corporation (ALB)? Read more to find out.

  • EV stocks have exploded- Musk is the world’s wealthiest person
  • Lithium is a critical ingredient
  • SQM is the Chilean producer
  • ALB extracts lithium from the earth’s crust
  • A look at the lithium price- Ready for a significant rebound 

Lithium is a chemical element with the symbol Li. It is a soft, silvery-white alkali metal. Lithium reacts violently with water, moisture, or steam to produce heat and flammable and explosive hydrogen gas, and toxic lithium hydroxide.

While lithium is a metal, it is soft enough to cut with a knife. It is so light, it floats on water, and a lithium fire is difficult to extinguish. The world’s leading lithium-producing countries are Australia, Chile, China, and Argentina. Lithium is an emerging energy commodity as lithium batteries power many EVs or electric vehicles.

If the price action in the commodities markets from 2008 through 2011 is a guide for 2020 and the coming years, we could see the lithium price experience an explosive rally. Central bank liquidity and government stimulus that launched commodity prices from 2008 lows and sent them to 2011 highs were far lower than in 2020.

The falling dollar is also bullish for raw material prices as the US currency remains the world’s reserve foreign exchange instruments and the benchmark pricing mechanism for commodities. Lithium demand is likely to rise as the US and other nations worldwide adopt greener energy policies.

Lithium may be an explosive metal, but in batteries, it is a far greener energy source than traditional fossil fuels. Sociedad Quimica y Minera S.A. (SQM) and Albemarle Corporation (ALB) are two leading lithium producers, and their shares could rise alongside the metal in 2021. Lithium is fast becoming an energy commodity in the new green era.

EV stocks have exploded- Musk is the world’s wealthiest person

Electric-powered vehicles have been capturing market share over the past years, and that trend is likely to continue. A dramatic shift in US energy policy in 2021 under the Biden administration will address climate change. As the US and Europe move towards alternative energy sources, the demand for lithium and other alternatives will rise. It may not happen today, tomorrow, next year, or in the next decade, but the policies are pushing hydrocarbons to become fossils rather than fossil fuels.

In a sign of the rise of the demand for EVs and the future policy direction of the US, Europe, and many parts of the world, Tesla (TSLA), the world’s leading EV maker, has experienced explosive growth.

Source: Barchart

The chart highlights the ten- and one-half-year rise from $3.51 to $884.49 for TSLA shares. At $826.16 at the end of last week, the company had a $783.118 billion market cap.

Source: https://companiesmarketcap.com/automakers/largest-automakers-by-market-cap/

Of the forty companies making automobiles, TSLA’s market cap was over 36% of the total. Elon Musk’s net worth at over $180 billion is only slightly below Toyota’s market cap and higher than all other leading car makers.

Lithium is a critical ingredient

One of the ingredients in Tesla’s car batteries and other EV batteries is lithium. Lithium-ion batteries provide high energy density compared to their weight. Since the late 1990s, lithium-ion battery technology has powered portable electronics, laptop computers, mobile phones, and power tools. Lithium has become a leading energy commodity, and that trend is likely to continue over the coming years. The shift towards cleaner energy sources will only accelerate the demand for the metal.

SQM is the Chilean producer

Sociedad Quimica y Minera de Chile SA has its headquarters in Santiago, Chile, and has been in business since 1968. Chile is the world’s leading copper producer, but it is also the second top lithium producer behind Australia. In 2019, Chile accounted for 21.5% of global output.

SQM produces and distributes specialty plant nutrients, iodine and its derivatives, lithium and its derivatives, and other products and services. At around the $56.50 per share level at the end of last week, SQM had a $14.871 billion market cap. The stock trades an average of over 1.19 million shares each day on the NYSE. SQM pays shareholders a $0.71 or 1.26% dividend.

Source: Barchart

The chart highlights that SQM reached a high of $67.75 in 2011 and a lower high of $64.20 in January 2018. After plunging to $15.20 in March 2020 during the height of the risk-off selling caused by the global pandemic, SQM rallied to the $56.50 level as of the end of last week.

The increasing demand for lithium for EVs is likely to push the producer’s shares to a new high over the coming months.

ALB extracts lithium from the earth’s crust

Albemarle Corporation has been in business since 1994 and is a specialty chemicals company with headquarters in Charlotte, NC. The company develops, manufactures, and markets engineered specialty chemicals worldwide. ALB operates in three segments- Lithium, Bromine Specialties, and Catalysts. The lithium segment provides butyllithium and lithium aluminum hydride for lithium batteries for consumer electronics and electric vehicles.

At around $180 per share, ALB has a market cap of $19.177 billion. The shares trade an average of over 1.36 million each day. ALB pays shareholders a $1.54 or 0.85% dividend. The shares have taken off on the upside.  

Source: Barchart

Before 2020, ALB shares had traded to an all-time high of $144.99 in late 2017. After falling to a low of $48.89 in March 2020, the price rose above the 2017 peak in December to a high of $187.25 in January 2021. The shares were near the highs at the end of last week, and the stock’s trend remains bullish.

While lithium production drives profits for SQM, processing the metal is the source of earnings for ALB. Meanwhile, the lithium price remains low, but that could change over the coming months and years.

A look at the lithium price- Ready for a significant rebound

Lithium Carbonate’s price, 99.5% Li2CO3 min, battery grade, traded in China, the world’s leading commodity consumer, is currently one-third the price from late 2017.

Source: https://tradingeconomics.com/commodity/lithium

As the chart illustrates, after reaching a high of nearly $150,000 per ton in late 2017, the price dropped below $37,000 in 2020. Lithium recovered to the $54,000 level in January 2020.

The overall price action in commodities on the back of central bank liquidity and government stimulus is bullish for lithium’s price. A falling US dollar adds to the bullish landscape. Moreover, the trend away from hydrocarbons in automobiles will increase lithium demand. The volatile metal could be set for an explosive rally.

SQM will benefit from rising lithium prices. ALB will increase prices to their customers as the price of the metal rises. Lithium is an energy commodity that stands to gain from the shift towards a greener path for power.

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TSLA shares were trading at $852.70 per share on Wednesday morning, up $8.15 (+0.97%). Year-to-date, TSLA has gained 20.84%, versus a 1.89% rise in the benchmark S&P 500 index during the same period.



About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.

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