Lithium – The Only Show in Town
Our coverage of lithium equity stories predates there being “stories”, in fact when we first wrote on the long-forgotten Admiralty Resources, it was the only Lithium story on the horizon. For those who do recall, Admiralty, quoted on the ASX, was the original developer of the Rincon salar deposit in Argentina. Eventually it ran onto the financial rocks in the great crisis of 2008 and the resource private equity fund swooped in on Rincon and took it out of the public eye.
The rest is history with a strong surge into the space between 2008 and 2010 with the onset of the rare earths boom taking the wind out of Lithium’s sails and rescuing the space from getting overcrowded, overhyped and “shop-soiled”. The survivors soldiered on as the ravaging promotional horde headed off to pursue other glittering prizes, which ironically meant the survival prospects of those remaining committed to Lithium has increased immeasurably. While there are always a few fakers in any mineral subspace, the Lithium space currently has a higher proportion of potential producers compared to mere wannabes than any other subspace we know. With such a high proportion of REAL companies the fakers stand out more clearly.
With Lithium in full flight and looking like the healthiest mining subspace, we must be ever vigilant for carpetbaggers appearing on the scene trying to rewarm some of their old snake oil.
The China Syndrome
As noted before the perpetual promotion of Tesla is starting to grate upon serious people in the mining space. If so many were not so invested intellectually (and financially) in the story there might be more critical assessment of the story with the use of parallels like Crocs and Cabbage Patch Dolls Likewise Hula Hoops and Yo-yos may be recurring fads over the decades but would one want to use either as a structural pillar of one’s portfolio?
While seemingly thousands of gallons of ink have been spilled in the cause of Tesla, the real game is elsewhere. Right from the start we have seen the game-changer for Lithium being a massive adoption of hybrid or wholly-electric vehicles. The last 10 years have seen the chattering classes in various Western countries fall in love with the hybrid concept with upper middle consumers with excess disposable income being early adopters.
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However on the scale of things this is/was mere dabbling as most of the batteries from such a “surge” end up being recycled for the next generation of buyers and creating merely a static-to-lightly rising demand after the initial surge. The recent fall in the oil price has made the attractions of adopting alternatives to the combustion engine even less attractive for Western drivers. What is needed therefore for an economy to make the metal switch is an over-riding prerogative.
In this day and age the only economy that is big enough to move the dial and that also has a dirigiste structure that can enforce a change is that of China. The motivations pile up with the desire for a domestic automotive industry with a Unique Selling Point, combining with a desire to avoid the type of oil-dependence the US suffers with the over-arching dilemma of a country choking to death on its own fumes.
The irony of China signing the latest environmental accords in Paris at the same time may have been lost upon Greenies in their fit of ecstasy, but we saw it as bordering on desperation that the Chinese should buy into the theme just as Beijing goes into total lockdown under a purplish pea-souper of their own devising.
A Matter of Machismo
If China’s main economic rivals can be said to be the US, Japan and South Korea, then there is something the rivals have that China does not have and that is an international automobile industry. Sure, China sifted over the remnants of the Swedish auto industry looking for inspiration but besides that China has made little impact on the broader scene. If we look at the two Asian rivals, both of them, two decades into their economic spurt started churning automobiles out to the wider world. However that was then, this is now. What have the Chinese got to offer to the international car market that is not satisfied already? The answer is nothing. They might scrap it out with Kia or Hyundai to produce cheap and cheerful low-end cars but it still begs the question of where is the Unique Selling Point in that?
China has seemingly managed to elbow Korea out of the pole position in the shipbuilding sphere by being cheaper, but in automobiles the niche that is going begging is the hybrid and electric car space which, for China, potentially kills multiple birds with one stone in that it also solves the oil import dependency issue and the urban air pollution problem. The key to dominance is critical mass and the thing China has at its disposal is that it is still in many ways a command economy. If the Five-Year Plan says all combustion-engine vehicles will be superseded by 2020 by electric power then it will happen. Such an enormous shift would lower the marginal costs of production of electric and hybrid vehicles down to a level that they could then, perish the thought, be dumped onto the international market making China the “go-to” manufacturer for electric vehicles on the cheap.
Of course, such a development would also make China an even more voracious consumer of Lithium than it already is and such a shift would require access to enormous reliable supplies of the metal.
The projections below send various messages but the most potent at the moment is that with production in 2017 running at five times the level of 2012, therefore the implication is that Lithium needs would be five times higher. And this is WITHOUT our mooted Great Leap Forward to an all-electric scenario in China.
The decision in recent weeks by China to slap a 30% export duty on Lithium products is the first sign of an “all-for-us, none-for-you” attitude coming down from the heights of Chinese economic planning with regards to this mineral. Unlike REE and Graphite, where China is by far the world’s biggest player, China is at the mercy of mines as far away as Australia or Argentina for its supply. Therefore a rush is on with the Chinese positioning themselves in assets in Australia thus far, but probably needing to diversify their sources of supply geographically in coming years.
The first signs are there that China wants a quantum leap in the hybrid/electronic vehicle space. This makes eminent sense on a variety of fronts. Graphite is the easiest mineral to get access to ride this trend but the product is rather low-value with few projects nearing actuality and none of size being imminent. Rare Earths are a graveyard of which the least said the better, while Lithium is the space with the most “real” players and the most advanced projects of consequence. Alarm bells must be ringing in Seoul and Tokyo, so expect competition for positioning in projects to heat up. With export quotas in place, demand rising and prices following suit, Lithium is defying the morbid trend in the very sad mining space and proving to be a real “hot-spot”.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>