Why Lithium Investing Isn't Always About Price

Supply Chain Expert Andy Leyland of SC Insights (Carrington Day Lithium Markets & Data Partner) shares a fantastic overview of what is driving uncertainty in pricing this crucial element.

I'd like to share my personal thoughts on why lithium investing isn’t all about the price.

For many investors lithium equity valuations are a conundrum, often trading at odds with the underlying moves in the lithium price. But why?

This can be partially explained by the lack of transparency in prices received by producers vs widely reported spot prices.

For years lithium sellers have had to enter into long term contracts, often with a percentage price discount; a price cap and floor (collar pricing); or even a fixed price. The reason for this is that lithium lacks a terminal market, that is, there is no liquid market of last resort, or futures exchange you can guarantee a sale on – as you would be able to do with copper or gold for example.

This brings uncertainty to investors, and uncertainty equals lower valuations, and less access to critical debt capital to fund expansions. Indeed, to get that much-needed debt capital producers are pushed to agree these long-term contracts, so they can prove a market for their product.

The reason: lithium is not a commodity, not yet, anyway. Commodities are interchangeable, have a high degree of homogeneity, and where they do vary, the cost of the difference is understood. This is what industry calls a value-in-use model.

Lithium isn’t there yet, especially for battery grade chemicals such as hydroxide and carbonate. These must go through stringent and time-consuming qualification processes. Qualification for one cathode or battery producer does not mean qualification for all.

This is further exacerbated by the conservative nature of legacy automotive companies, each vying to recreate its brand in the electric vehicle space – none of them want the reputation for poor battery performance which sub-par lithium could bring.

How to solve this? More producers, more consumers, more experience and increasing liquidity of futures exchanges such as the LME, or Over-The-Counter trading facilitated by banks and online platforms. All of this is happening, but it takes time. When it does happen, the rewards will be high.

Consumers will be able hedge their price risk, something they’ve long signposted they want to do. Producers will be able to guarantee a sale, no more opaque contract prices. Investors will have increased certainty and options to manage risk, and sector-wide valuations will rise. Indeed, it’s possible that equity valuations will increase even if the underlying 'commodity' price falls.

The price increases of the past two years have added anywhere up to $3,000 to the cost of an electric vehicle, dependant upon the size of the battery and the price actually paid for lithium. That’s a sizable slice of cash when long range, mass market EV prices start moving to the $35,000-$40,000 sweet spot. Something which is needed to replace the dominance of internal combustion.

To find out more about how we analyse the #lithium and #lithium-ion supply chain please contact: dallott@sc-Insights.com

#lithium #lithium-ion #electricvehicle #supplychain #automotive