Attention Raw Material Shoppers, Investors and Purchasing Agents Alike: Stop Worrying about the Supply of Lithium
By Jack Lifton
22 Aug 2007 at 05:51 PM GMT-04:00
resourceinvestor.com
DETROIT (ResourceInvestor.com) -- Those who follow or invest in the producers of raw materials and finished products that depend on the advent of a safe, reliable large capacity lithium (electro)chemistry-based rechargeable battery should worry about this headline from August 21, 2007’s Times of London: Japanese experts demand change to make phones and laptops safe.
I need to ask two questions to the writers and disseminators of the above headlined story:
1.
Why is it not mentioned that if a small device is unsafe, what does that say about one that is a thousand, yes, a thousand, times larger, like the battery pack for a hybrid electric car (HEV) or an all-electric car (EV)?
2.
Do articles like the one cited above have any influence on future lithium supply as well as demand?
Perspective is the key to objectivity, especially when you are investing in strategic metals for which there is no futures market or transparency in pricing. As the speculative - or “technical,” as those in the market call it - portion of the price of commodity metals in the regulated markets declines during a market “correction,” such as is happening now, that same situation must also be happening to non-exchange traded metals. It is just more difficult to get information about non-exchange traded metals, such as lithium, so I set out to do that.
A very savvy former Fortune 500 corporate purchasing officer I know says that the dollar cost of producing a pound, for example, of exchange traded copper at Codelco - perhaps the world’s largest producer of copper - in Chile in the first quarter of this year was $1.35 to $1.55. All of the rest of the current price is profit and speculation. What the same numbers are for lithium and what part of its future demand is projected to be are dependent on rechargeable batteries for vehicles or on its future demand for use in primary, one time use small batteries for portable electronics - all of which demand is subject to the safety fears noted above.
Small investors, such as you and me, rarely stop to think about how the exchange traded price of a commodity metal, such as copper, actually affects the producer. Investors seem to think only about the direct effect on end users. As the price of copper goes up on the LME, COMEX, or NYMEX, the cost of producing the metal does not, unless the producer decides to invest in new capacity to meet the “projected” new demand. This type of investment is, however, traditionally considered more of a risk than an opportunity by banking institutions and other investors.
The current upward cycle of prices in commodities and in all metals is part of the Asian demand explosion, which has also swamped the world in liquidity. Even mining companies, at least the majors and now the conglomerates, have bundles of cash. But they seem to be using this cash and the value of their shares more to consolidate the industry, so as to maintain pricing, rather than to simply expand output.
Mining companies have seen all of this before, just not on such a large scale. The pundits have brought it into perspective for themselves by calling the price and demand run up of the 21st century a - drum roll, please - “super” cycle. But note that it is still called a “cycle” in homage to the undeniable laws of gravity and demand that what goes up must come down, no matter what.
There is, of course, also the effect that I call the price escalator. By this I mean that even as prices decline, they never, short of a world economic recession/depression, will drop back to where they started. Part of this is simple price inflation caused by the classic “too much money chasing too few metals,” and part of it is due to the costs of borrowing, social restructuring (Chinese workers will eventually want to be paid a “global” wage, for example. This is already occurring in east Europe where locals have decamped for high paying jobs in other countries leaving a labour shortage, which will only be ameliorated sooner than later by significant wage hikes), and mistaken judgments in long term planning, i.e., preparing for too little future demand by shutting down facilities that are very expensive to reopen, such as the Russians did with gallium during the Cold War or by using up so much capital and credit to build an oversupply that a fall in demand cannot be accompanied by a fall in price due to repayment obligations.
It is rare to meet a mining company with a balanced perspective and a long term concern for its production. But I did, and I think that end users of lithium for new uses such as rechargeable batteries should take careful note of what was said.
I spoke on August 17, 2007, with the commercial vice president of Sociedad Quimica y Minera (SQM) [NSYE:SQM], the Chilean chemical company that is the world’s largest producer of lithium chemicals and has the largest accessible reserves known of lithium in brine. Its production and reserves are both provided by the lithium content of the brine deposits in the Andes Mountains from which the company produces potassium salts for use as fertilizer; iodine for all uses; and lithium for a variety of uses. Lithium constitutes just 17% of the company’s turnover even at today’s prices; it is fertilizer production which is the company’s backbone, and the demand for that product is not necessarily linked to the commodity super cycle, so SQM is in a good position with or without lithium production.
Rather than a dialog or a narrative I will tell you what we discussed as a report to the interested small investors and corporate purchasing specialists who make up the lithium engaged readership of ResourceInvestor.com.
SQM is a large primary producer of potassium compounds for fertilizer. Its principal investor is the Canadian Potash Corp. of Saskatchewan [NYSE:POT], a very well-managed and profitable major player in the global fertilizer business which owns 70% stake in SQM. POS originally invested into SQM for that company’s immense accessible reserves of potassium chemicals in the covered-over brine lakes of the Atacama Desert, in the Chilean Andes.
It is important not to confuse the minerals found in the brine close beneath the surface of the Atacama Desert with the historical sources of potassium nitrate found in immense fields originally created by bird droppings in Chile, the famous guano, which have been mined to produce saltpetre, or potassium nitrate, to make gunpowder ever since they were discovered at the beginning of the age of European imperial expansion by the gold seeking conquistadores of Spain.
The reason for SQM’s dominance in the lithium supply area has to do with three key and concomitant factors:
1.
The Atacama brine is (relatively) rich in lithium, as much as 0.15% by dry weight. If you think that’s not a lot, translate it for yourself into what that would mean if it were in a gold mine.
2.
The brine is not far below the surface of the desert, which traps the water.
3.
The normally economically prohibitive large amount of energy needed to dry the brine is provided by the high altitude sun, which created the desert environment in the first place.
SQM needs to do no tunnelling or rock removal. Bulldozers create hills of drying brine which are progressively moved along a path as they dry, so that by the end of the process the dry material has been enriched to 6% lithium. This mechanical chemical process takes one year in the Atacama. This is then moved to where it can be processed by long established chemical techniques to separate out the lithium, primarily as lithium carbonate, which in various grades produced in Chile and elsewhere by SQM and its subcontractors is the main item of commerce for battery cathode material makers, who in turn supply the battery makers. SQM does not sell directly to battery makers or the battery makers’ customers.
Note that by contrast the same type of formation in northern Nevada, which is today “mined” by Cyprus Foote Mineral, now a division of Metallgesellschaft, AG, of Germany, is much, much, smaller and, because of its lower altitude than the Atacama, requires a year and a half to enrich the brine to its maximum of lithium. MG also operates a concession in the Atacama, but it is a much smaller operation than SQM’s.
Find a comprehensive “official” overview of the global lithium market here.
In 2002, SQM was selling lithium carbonate for $2.00 per kilogram. Today the price for the same item is $7.00 per kilogram. But it is not the super cycle that has caused this; it is actually supply and demand. Beginning in 2002, lithium demand exceeded supply due to the sudden sharp increase in demand for lithium to produce single-use, primary batteries for portable electronics. SQM and its smaller rival, at least on the Atacama, MG, applied for licences to be allowed to increase production. The regulatory authorities ultimately granted the licences, and operations to increase lithium output were begun by 2005. By 2007, supply and demand were once more in balance.
SQM’s production is now increasing daily, and, even if current world growth in lithium demand stays at the current figure of between 6% and 7%, SQM alone is increasing production yearly by more than that amount, as measured by total global demand. SQM and MG have been licensed by the Chilean government to increase their production capacity to a total of 38,000 million tonnes (mt) by 2012. Thirty thousand million tonnes of this is allocated to SQM and 8,000mt to MG. To put this in perspective, note that MG’s allocated total alone is equal to SQM’s total output in 2006. Finally it should be noted that by 2012, if SQM brought all of its allocated production increase on stream, it would be able to supply the currently projected world demand for lithium by itself.
There are three major uses for lithium chemicals today: glass, ceramic, and glass frit (glass powders used directly, such as in reflecting signage and highway marking and as an ingredient of “cements” used to assemble glass objects); chemicals for processing, such as butyl lithium used as a catalyst for the production of an immense range of plastics and organic chemicals, or for direct use, such as lubricating greases and pharmaceuticals for human consumption; and batteries - mainly one time use, for portable electronics. SQM is the world’s largest supplier in all three categories.
SQM estimates that hybrid electric vehicles, HEVs, and all electric (battery or fuel cell) vehicles, EVs, will typically use 2 kilograms of lithium carbonate each to produce their batteries if all goes according to plan in the development of lithium batteries. This would require 3,000mt of lithium carbonate for the 2 million such vehicles that SQM projects will be built in the year 2012. Even if this comes true, there will be a licence for production supply overhang capacity of lithium of enough material, just produced by SQM, to build an additional 2 million vehicles in 2012, SQM projects.
Here then is the key issue for end users, such as General Motors [NYSE:GM] and Toyota [NYSE:TM]. Should they create a virtual hedge for themselves to ensure their supply of lithium by agreeing to an off-take from SQM for its supply overhang? The answer is yes, if they believe in the future of the lithium battery for vehicular propulsion. They can set an indexed price and allow SQM to inventory the raw material for them until needed. GM or Toyota, or a fund with a long term outlook or need - did someone say Cerberus? - can eliminate the risk of non-availability in the production of 1 million HEVs or EVs a year by purchasing 1,500mt a year of lithium starting next year from SQM, and even if the buyer pays today’s price, it will cost a total of $10.5 million per year, an insignificant amount of money for so much insurance. Note that even if the lithium is never used in vehicles, it will be used up over time and can be sold off for other uses, so that the total money outlay will probably wind up being, in the worst case, a net of less than $7.5 million a year for this risk management insurance. It’s a great deal, and it doesn’t even need to be publicized.
Purchasing agents take note that the buying of the off-take is the only way to ensure that SQM increases production to its maximum allocation. Lithium today is sold on the basis of price set for quarterly use and delivery. SQM has stated that it is open to longer price guaranteed periods and perhaps indexing if the contract length is substantial.
Of course the off-take can be distributed among SQM, MG, and perhaps, China, which today produces 24% of the annual global output of lithium, but I think that political country risks will give some buyers pause before entering into an off-take with a Chinese supplier. In addition it should be noted that today the main Japanese producers of cathodes for small lithium batteries buy their micronised lithium carbonate from SQM to ensure its quality.
There’s possibly even a speculative play here. I suspect that if an off-take is signed with a major end user then the market will react positively on the news no matter where the lithium price happens to be beforehand. |
