In 2014 Albemarle Corp. announced the purchase of Rockwood Holdings, Inc. for $6.2 billion. This solidified Albemarle's position as the top lithium producer in the world. They control two of the largest lithium mining operations in the world.
Albemarle is unique among the major lithium producers because of its cost advantages and ability to rapidly increase production to meet incremental demand. This is due to the aforementioned mines. Its important to understand the two main methods of lithium production and the associated costs.
There are five main applications that fuel the demand for lithium
All five of the aforementioned applications are important in the lithium supply/demand equation; however the majority of market share can be attributed to batteries. Batteries are also projected to be the main contributor to future demand growth.
Dr David Deak, chief technical officer at Lithium Americas, who formerly worked as an engineer for Tesla, says the lithium market needs to grow from its annual production of 182,000 tons to an average of 3.1 million tons for 20 years to electrify the world’s fleet of vehicles (read more). Automakers from around the world are vying for market share as the adoption of electric vehicles grows in popularity.
Currently electric cars are less than 1% of new car sales. Yet almost every automaker is diving head first into the niche market.
"The lithium market needs to grow from its annual production of 182,000 tons to an average of 3.1 million tons for 20 years to electrify the world’s fleet of vehicles"
Stricter government mandates on fuel economy and a global push towards cleaner energy may be to blame for car manufacturers embracing alternative fuel sources this time around, but any market change as large as this one also needs the consumer on board and demand for electric vehicles has increased substantially.
Tesla has found a way to bring the first affordable (starting at $35,000) mass production electric vehicle to market (Model 3) and it won't be the last. On July 5th Volvo announced that their entire fleet will be either be hybrid or electric by 2019. This huge push into electric vehicles has already had a major impact on the demand and price of lithium and we're only scratching the surface of what's to come.
In Albemarle's first quarter earnings call it raised its forecast for lithium demand by the end of the decade. It raised its initial forecast of 20,000 tons a year through 2021, to 30,000 tons a 50% increase from its initial forecast.
According to Benchmark Minerals Intelligence lithium production rose by 14% in 2016; however this was still not enough to satisfy demand causing prices to jump by 74% in December (see graph above).
Lithium contract prices have jumped from $4,000 per metric ton to $20,000 per metric ton because producers simply can't keep up with demand "From a lithium standpoint we're pretty much sold out." Albemarle CEO Luke Kissam explained in an earnings call last year.
Financial institutions and analysts around the world are in agreement that in the next several years we will see a significant increase in the demand for lithium. According to Paul Tullis a writer for Bloomberg Businessweek the rise in demand will be driven by batteries for electric vehicles and energy storage for wind and solar plants. He also states that Goldman Sachs has suggested that the market for lithium in energy storage could eventually be bigger than in all other products combined (read more).
"Goldman Sachs has suggested that the market for lithium in energy storage could eventually be bigger than in all other products combined."
Many analysts on Wall Street have factored very little demand coming from large scale energy storage. Tesla has announced the Powerwall as its idea for residential energy storage. This is a huge development because historically solar panels and wind farms have had no way to store excess energy created in times of low energy usage, so it was wasted. On the contrary in times of high energy usage fossil fuel "peakers" were used to make up the excess demand.
NextEra Energy (NEE) has already started using batteries as a means to store additional renewable energy in times of low usage, so they don't have to rely on "peakers" in times of high usage. They currently have a 20MW battery powered energy storage station in Illinois and three more facilities slated to come online in 2018.
The world is slowly adopting and embracing alternative energy sources. I do not believe the uptake of these new energy sources will happen overnight, but I do believe there is a huge opportunity to invest in this monumental change. The demand for lithium has far exceeded supply and I anticipate this will be the case for the foreseeable future. Albemarle Corp is in a far better position than most of its competitors given its recent acquisition of Rockwood. This acquisition exhibits the foresight Albemarle's management team has. Given the Rockwood acquisition Albemarle is able to increase production to meet incremental demand and it owns some of the lowest-cost assets in the world.
Disclaimer: The aforementioned article and analysis is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment decisions. If you are not a professional you should contact your financial advisor or seek out professional guidance as necessary.