Investors will find the most leverage in the energy market this autumn in…energy metals.  Lithium, cobalt, vanadium were all niche metals for decades until cell phones and laptops hit critical mass, but now the demand is going vertical with large scale energy storage and Electric Vehicles (EVs).  Mainstream metals nickel and copper will also benefit.

As usual, it’s not the abundance or scarcity of the metals in the ground that’s the issue, and I think that’s where many investors get sidetracked.  Metal prices—and hence stock prices of the explorers & producers—are really more determined by permits.  Staking permits, exploration permits, environmental permits, development permits, construction permits, production permits…you get the picture.

I think there is a legitimate, greater mainstream interest in the public to know more about how resource projects are built and their impacts on local communities and ecology ( I 100% agree).  But there is also a political, anti-development part of society that is now very vocal, and powerful.

Both these groups are bullish for metal prices, as they either delay permits or help them get outright denied, keeping metal in the ground.

Lithium is a great example.  Lithium is an abundant metal when you look at its prevalence in the earth’s crust. Mining, concentrating, and converting it to a form that an end user can inject into their existing supply chain is the key to value creation. And as the latest lithium boom began in January 2016, most ‘experts’ (I think ‘pundit’ would be a better word) thought the major producers would quickly bring on new supply and swamp the Market.

The reality however, 20 months later, is that lithium prices have stayed near recent highs, as everyone is now understanding that securing supply for the accelerating EV boom will be more difficult than we all thought back in 2016.

In fact, as I’ll explain below, the major lithium producers are likely now in a position where they will have to buy de-risked developers to meet their goals.

This is great news for shareholders of the burgeoning junior lithium space.

Example:  lithium leader Albemarle (ALB-NYSE) wants to be producing 165,000 tons per year (tpy) of Lithium Carbonate Equivalent (LCE) by 2021, up from 89,000 tpy today. As context, the global LCE market today is estimated at 190,000 tpy.

As expansion in Chile continues,  operational issues are likely as brine projects are notoriously difficult. Major challenges here could prevent them from reaching their 165,000 tpy goal.

The bigger issue for them is building out both their mine and conversion capacity. This tripped up several companies during the last lithium boom in 2012. Lithium hydroxide is becoming the preferred lithium chemical in the battery business.

Albemarle bought a plant in China earlier this year owned by Jiangxii Jiangli New Materials Science and Technology Co. for $145M which produces 15,000 tpy hydroxide and are expandingit to produce an additional 20,000 to 25,000 tpy by 2018.

Bringing brine operations online is incredibly difficult. Another producer having issues is Orocobre (ORL-TSX; ORA-ASX).  Two years ago, they said they would be producing 17,600tpy per year of Llithium carbonate by now…current production is closer to 11,000 to 12,000  tpy due to design and operational issues, and poor weather affecting brine quality.

Another major lithium producer is FMC Corp (FMC-NYSE). They have a goal of  40,000 t of lithium carbonate and 30,000 t of lithium hydroxide by 2020. The company needs permission from Argentine authorities to expand (which should happen, but by when is The Big Question).

A more pressing issue is that they don’t have anywhere enough feed stock locked down to achieve these goals. They are counting on an additional 4,000 tpy of supply from “de-bottlenecking” and 8,000 tpy from their off-take agreement with Nemaska (NMX-TSX; NMKEF-OTCQX).

But Nemaska isn’t financed yet, and this 377 million share company still needs about US$439 million all-in to get into production.  They likely won’t be shipping carbonate in meaningful quantities until late 2019 if all goes well.

FMC also wants to add 20,000 t of carbonate capacity which they will “source”. they haven’t indicated where this will materialize–and it’s now quite expensive to do so.

To put this in perspective, 20,000 t is roughly the equivalent of one mine’s yearly production. FMC needs this feed – and soon – otherwise it’s difficult to see them even coming close to reaching their goals.

Here a list of potential new supply in tons per year going out to 2021, by company:

SQM                                                   80K t LCE
Albemarle                                         70K t LCE
Pilbara                                               44K t LCE
Altura                                                27K t LCE
Orocobre                                          15K t LCE
Galaxy                                               25K t LCE
Nemaska                                           29K t LCE
FMC                                                30K t LCE

In general terms, I think the Market can expect an additional 10K-15K tpy out of China, and from small projects dotted around the globe…maybe an additional 15-20K tpy.

Should all of these projects come on line on time (which is unlikely if history is our guide) the Market will have an additional  335K t of new LCE supply on the market in 2021. This will meet 12% CAGR demand growth for LCE for 2021, and keep the market in balance.

But the lithium market has been growing at a 14% demand growth rate, so the takeaway is clear – Money and investment in lithium needs to be happening NOW in order to reach production goals by the start of the next decade.

Any lag in supply in the coming years–with demand so strong going forward–should ensure a tight market, and strong valuations for both lithium and the stocks of lithium producers.

Keith Schaefer