The last decade has been brutal for commodities, with the sector posting declines in 7 out of 10 years. Last year was not much better, merely remaining flat after managing to claw back most of its early year losses. Few commodities, however, have been more disappointing than lithium, a metal that was supposed to make investors rich as EVs replace their dirtier ICE brethren. Lithium enjoyed a meteoric rise in the 2016-2017 period, with prices doubling since the beginning of 2016 and nearly quadrupling since the turn of the decade. The fact that the rally coincided with a sharp rise in the value of the U.S. dollar makes it all the more remarkable.
But alas, those gains were not to last, with new supply, especially from China's new hard-rock projects and Chilean brine mines, getting out whack and derailing the market.
Shares of major lithium producers and explorers, including Sociedad Quimica y Minera de Chile (NYSE:SQM), Albemarle Corp. (NYSE:ALB), and Orocobre Ltd (ASX:ORE) received a major hammering after Morgan Stanley forecast that Chilean low-cost brine producers could add as much as 200kt per year by 2025, while the expansion of China's and Australia's hard-rock mines could pump in another half a million metric tonnes over the timeframe. That's certainly a massive ramp-up considering that global production in 2017 clocked in at just over 200kt.
But maybe the bulls rushed their fences, and time might finally be ripe for "white dust" to reclaim its old billing as "white gold."
Here are three key reasons why lithium could be poised for a multi-year rally. Related: The Next 5 Days Could See A Buying Spree In Oil Futures
Source: Trading Economics
#1. The EV Explosion
In 2020, lithium prices managed to snap their multi-year decline and record a 22% rise thanks to ESG and the electrification drive gaining serious momentum.
Indeed, the shift from fossil fuels to renewable energy is in full swing, and the EV sector has become a Wall Street darling. The leader of the space, Tesla Inc. (NASDAQ:TSLA), has seen its shares surge 737% over the past 52 weeks; NIO Ltd. (NYSE:NIO) has climbed 1,272%, Workhorse Group Inc. (NASDAQ: WKHS) 637%, Nikola Corp. (NYSE:NKLA) 70% and Fisker Inc. (NYSE:FSR) is up 53% over the timeframe.
The EV sector has proven to be amazingly resilient, maintaining growth amid the Covid-19 pandemic.
And the EV outlook has just improved after the Democrats clinched two pivotal seats in the U.S. Senate in the Georgia runoff, opening the path for Joe Biden's government to implement the ambitious Green New Deal. The president-elect has pledged to build 500,000 EV charging stations, or roughly a five-fold increase in the country's EV infrastructure and enough to cover nearly 60% of the country's charging demand. That scale of buildout could drive the sale of some 25 million electric cars and trucks by 2030, as per estimates by Bloomberg New Energy Finance (BloombergNEF).
That kind of expansion will no doubt provide a huge lift for battery metals like lithium.
Tai Wong, head of metal derivatives trading at BMO Capital Markets, has predicted a 14-fold increase in demand for metals like nickel, aluminum, and iron as well as a 9-10x increase in demand for lithium and graphite as the electrification drive continues to gain momentum.
#2. The Great Reflation Play A cross-section of Wall Street luminaries from Pimco to Point 72 have predicted a broad commodity rally thanks to the so-called reflation trade. Indeed, Wall Street is predicting a new commodity bull market that will rival the oil price spikes of the 1970s or the China-driven boom of the 2000s.
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Market sentiment has been shifting from deflation fears to reflation hopes, thanks to investors growing more confident about the ability of governments to stimulate growth via adaptive fiscal policies. Value stocks, financials, and cyclicals are expected to be the biggest beneficiaries of this reflation trade, especially in mature stock markets. Most commodities are cyclical in nature, and the lithium boom is about to replace the bust cycle that has dominated for years.
#3. Global Economic Recovery
After a horror show in 2020 due to Covid-19, most pundits are predicting a global economic recovery that could last for a couple of years. The World Bank sees the global economy expanding 4% in 2021, as the COVID-19 vaccine rollout becomes widespread throughout the year.
Most experts, though, are warning that a recovery is likely to be subdued unless policymakers move decisively to tame the pandemic.
The vaccination program in the United States has so far been progressing at a slower-than-expected pace, with the nation's top infectious disease expert, Dr. Anthony Fauci, saying there's plenty of room for improvement. So far, only 5.3 million people have been vaccinated nearly a week into the New Year, way short of the 20 million vaccine target. But as Fauci noted, the new vaccination program is new, which inevitably means negotiating a steep learning curve.
A Covid-19 variant is also causing jitters everywhere, with more than 50 new cases having been reported in the United States. Two variants, one from the U.K. and the other from South Africa, have already been identified with growing fears that the South African variant could be resistant to the COVID-19 vaccines approved or awaiting approval in the United States and Europe.
The good news is that the mutations are "unlikely" the mutation would make the vaccines ineffective according to senior Oxford immunologist Professor John Bell, though he has noted that that the vaccines might need tweaks to provide as much protection against the strain as they do against the others already in wide circulation elsewhere.
For investors interested in leveraging the lithium boom, the Global X Lithium & Battery Tech ETF (LIT) provides excellent exposure since it has holdings across the whole of lithium's value chain.
Source: CNN Money
By Alex Kimani for Oilprice.com
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