What are the best lithium stocks to watch?

What is lithium used for?

Lithium has long been used for industrial purposes, helping to create the likes of glass and ceramics, but today it is mostly used as a key component in batteries that power everything from smartphones and tablets to electric cars and scooters.

It is still early days, but the rise in electric vehicles has provided the greatest momentum to lithium demand. In 2010, over 40% of lithium was being used to create glass and ceramics while batteries accounted for just 14%. Today, more than half of all lithium is used in rechargeable batteries and that is expected to increase as more electric vehicles and portable devices enter the market over the next decade. Below is a chart outlining the end uses for lithium that was produced in 2019.

Where is lithium found and how is it produced?

Lithium is predominantly produced from two different sources – by mining hard rock or extracting it from brine deposits. Brine deposits are essentially accumulations of groundwater that contain lithium, which is extracted as a salt. Hard rock mining is conducted in a more traditional manner by being taken from a lithium-bearing mineral called spodumene.

Read more: Lifecycle of a mine - a step-by-step guide to mining commodities

Most of the world’s lithium is concentrated in just a handful of countries. Chile is home to over half of the world’s lithium reserves, with other major producers including Australia, Argentina and China. Australia is by far the world’s leading producer of lithium. South America is more associated with brine deposits, while Australia is the leading producer of hard rock lithium.

Read more: Mining in Australia: what you need to know

Expectations for batteries is rising as electric vehicles take off. Battery developers are constantly trying to make batteries lighter, last longer and charge quicker, and part of this comes down to the type of lithium that is used. Companies like Tesla have tinkered with the ratio of metals to try to improve the range its batteries can deliver, which include other key metals like nickel and cobalt.

There are many types of lithium and all of them are suited to different purposes. The two predominant types are lithium carbonate and lithium hydroxide. Lithium hydroxide is regarded as the premium product that is better for battery production (although there are carbonate batteries too).

Notably, the lithium mined from spodumene can be turned into either hydroxide or carbonate, but lithium extracted from brine must be turned into carbonate before it can be converted into hydroxide. This is one reason why there is a growing consensus that hard-rock lithium operations are more suitable for supplying the electric vehicle market.

What is the outlook for lithium?

While lithium has a wide range of uses (for example, it is used in pharmaceuticals to treat depression and in alloys to utilise its lightweight properties), the amount of demand from electric vehicles is expected to dwarf existing supply to traditional and established markets. This means the outlook for lithium will be largely dictated by the adoption of electric cars.

Read more: What metals are needed for electric vehicles and battery storage?

The electric vehicle market is still nascent. Only three in every 100 cars sold worldwide in 2019 were electric, according to the International Energy Agency (IEA), with a record 2.1 million sold during the year. There was estimated to be over 7 million electric vehicles on the road at the start of 2020, up from just 17,000 in 2010. Notably, China is by far the biggest market and accounted for just under half of all electric vehicle sales in 2019.

However, electric vehicle sales have started to stall after several years of strong growth. Year-on-year (YoY) sales rose over 30% between 2016 and 2018 but increased just 6% in 2019. This was driven by the wider automotive market contracting, a number of subsidies for electric vehicles being scaled down in nations like China and the US, and because consumers continue to wait for better batteries and more charging infrastructure to be installed.

Read more: How to invest in electric cars

The coronavirus outbreak has exacerbated the automotive industry’s problems as people travel less and tighten their belts. Sales have plunged and the IEA expects overall sales in the automotive industry to fall 15% in 2020, but says sales of electric vehicles should remain broadly flat from 2019. Over the longer term, some believe the virus could actually accelerate the adoption of electric vehicles as countries look to ‘build back better’ by investing in green technologies.

This means there has been severe pressure on lithium prices since the start of 2019, and that has continued in 2020 due to the coronavirus pandemic. The recovery of the world economy remains highly uncertain, which could weigh on prices over the short term, but the metal has strong long-term fundamentals so long as the world continues to gradually adopt electric vehicles.

How to trade or invest in lithium stocks

With IG, you can trade on the best trading platform and back whether you think lithium stocks will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.

To take a position, follow these simple steps:

1. Create an IG trading account or log in to your existing account
2. Type the name or the ticker/code of the lithium stock you want in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

Top 5 lithium stocks

The lithium market used to be dominated by just three companies - Albemarle, Sociedad Quimica y Minera de Chile and FMC – which used to produce over half of all the world’s lithium. However, the market has changed dramatically over the last decade as the rise in demand for lithium has encouraged more companies to enter the market, which has eroded the market share of the big three.

Chinese companies Tianqi Lithium and Ganfeng Lithium, both encouraged by China’s attempts to dominate the lithium market and electrify the country, have become significant players. China is one of the few countries to hold a significant amount of lithium reserves and it is one of the largest producers of electric vehicle batteries, competing with Japan and South Korea, according to McKinsey.

Plus, FMC’s decision to spin out and rename its lithium business Arcadium Lithium Plc in 2018 means FMC is now focused on agricultural products. Below is a chart that shows the market share of lithium production in 2019.

Albemarle

Albemarle has long been the world’s leading producer of lithium. The US company has a mixture of brine and hard-rock mining operations in Chile, Australia and the US, and makes both lithium carbonate and hydroxide. It also has one of the largest networks of processing plants.

It has plants capable of producing battery-grade lithium in Europe, Australia, China, Chile and the US. While the electric car market is the driving force behind the company’s growth, it makes over 100 different lithium-based products for various industries around the world.

Importantly, Albemarle does not solely produce lithium but also catalysts and bromines that are used by the pharmaceutical and a number of other industries. This diversification helps it offset any weakness in one market and its income is broadly spread between all three divisions. However, lithium is at the heart of its ‘aggressive growth’ strategy and it is the fastest growing and highest margin segment of Albemarle’s business.

Sociedad Quimica y Minera de Chile

Sociedad Quimica y Minera de Chile (SQM) is listed in the US but is rooted in Atacama Desert in Chile, where it has exclusive access to huge reserves of caliche and brine, which allows it to produce a wide array of commodities, with caliche bearing the likes of iodine and nitrate while its brines contain lithium and potassium.

It says its brines ‘contain the highest concentrations of lithium and potassium’ in the world, and also produces other commodities like sulphate and boron.

Lithium is one of the smallest parts of the business, but SQM is committed to rapid expansion in anticipation for a spike in demand as electric vehicles take off. It is aiming to double production from 55,000 to 60,000 metric tons of lithium in 2020 to 120,000 tons in 2021 and is expanding its ability to make both lithium carbonate and hydroxide.

This is reflected in its expansion into hard rock operations in Australia back in 2017 under a venture with Kidman Resources.

Ganfeng Lithium

Chinese outfit Ganfeng Lithium is listed in Shenzen and Hong Kong, and offers the broadest exposure to the lithium supply chain. It mines lithium from four hard-rock projects, one named ingdu Ganfeng in China and three in Australia called Mount Marion, Pilbara and Altura.

However, it has expanded into brine and even clay operations by investing in or partnering with other firms operating in Argentina, Mexico and Ireland. Ganfeng also has extensive midstream operations in China producing lithium carbonate and hydroxide.

It’s main unique selling point is that it also produces batteries and provides a recycling and recovery service, meaning it gives exposure to the value across the entire supply chain. It is already a key partner to battery makers like BYD and electric car makers such as Tesla.

Tianqi Lithium

Tianqi Lithium is the other major Chinese company in the market, although it is only listed in China. The company has rapidly expanded by buying up and investing in lithium projects, with resources in Australia, Chile and China. This includes a 51% stake in the world’s largest lithium mine named Greenbushes in Australia, which it owns alongside Albemarle.

It is also developing the Kwinana lithium hydroxide plant in Australia that will be supplied by Greenbushes. It took a sizeable stake in SQM back in 2018, when it invested over $4 billion into the Chilean firm.

Livent Corp

Livent Corp became the largest publicly-traded pure lithium play outside of China when it was spun-out of FMC Corp back in 2018. FMC separated its lithium business to leave it focused on agricultural products.

Livent’s primary project is a brine deposit in Salar del Hombre Muerto in Argentina, which has been up and running for over 20 years. This supplies lithium carbonate that is sent on to numerous plants spread across the US, UK, China and India that turn it into lithium hydroxide for the electric vehicle market, butyllithium that is used in polymers and by pharmaceutical firms, and a range of specialty lithium compounds used to build things like aerospace parts.

Argentina may host its source of lithium, but Livent sells the majority of its product in Asia, which accounts for 59% of revenue. It has said that ‘we expect the shares of lithium hydroxide, energy storage and Asia as percentages of our total revenue by product, application and geography, respectively, to increase’ as the electric vehicle market gains momentum.

Other lithium stocks to watch

Below is a list of some of the smaller lithium producers to consider from around the world, including some still in the exploration or development stage.

• Lithium Americas: A Canadian-based company listed in Toronto and New York with two lithium projects under development. These are the Cauchari-Olaroz brine project in Argentina and the Thacker Pass hard-rock project in the US (which it claims to hold the largest lithium reserve in the US).
• Orocobre: An Australian company developing the Olaroz lithium project in Argentina that produces lithium carbonate, and it also has a 35% stake in Advantage Lithium, which it spun out in return for the sizeable stake back in 2016. Advantage Lithium’s primary project is a joint venture to develop the Cauchari lithium project, which lies south of Olaroz. Orocobre also produces borates from several projects in the country.
• Pilbara Minerals: An Australian firm that wholly owns the Pilgangoora project that is prospective for lithium and tantalum. It is a hard-rock project that is aiming to eventually produce up to 1.2 million tonnes of spodumene and one million pounds of tantalum per year.
• Galaxy Resources: An Australian company that is already producing lithium from its hard-rock operation named Mount Cattlin in Australia. It also has two other major projects in development, the Sal De Vida Catamarca brine project in Chile and the James Bay hard rock project in Canada.
• Bacanora Lithium: Leading the charge in London is UK-listed small cap Bacanora Lithium, which is developing the Sonora lithium project in Mexico and has an investment in Deutsche Lithium, which owns the Zinnwald project in Germany.

Top lithium ETFs

Choosing a stock is one way of getting into the lithium market, but exchange-traded funds (ETFs) can allow investors to gain broader exposure at a lower risk. ETFs behave like stocks do, but they derive their value from investing in numerous companies operating in the same sector. This means you can invest in a slice of numerous lithium companies through an ETF, rather than putting all your eggs in one basket by picking an individual stock.

These ETFs, however, will be vulnerable to any market downturn that hits all lithium or battery stocks and won’t offer the same diversification or defensive properties that some of the largest lithium producers offer.

Global X Lithium & Battery Tech ETF

The Global X Lithium & Battery Tech ETF invests in a range of companies that produce lithium or make lithium-based batteries, therefore providing exposure to both the lithium and battery markets. Over 70% of its investments are in Asian companies, with most of the remaining holdings based in the US. Its top ten holdings, which account for 57% of its overall portfolio, as of 18 August were as follows:

ETFS Battery Tech and Lithium ACDC

The ETFS Battery Tech & Lithium ACDC invests in companies from around the world that are involved in creating batteries as well as the mining companies that produce the commodities needed to make them. Over half of the stocks in its portfolio are based in Asia, with the rest equally split between the US and Europe. Its top ten holdings, which comprise 44% of its overall portfolio, as of 18 August were as follows: