This weekend sees the debut of ‘Formula E’ racing in London.
As the name suggests, the competition is basically a small-scale version of F1 with one big twist – all the cars are powered by electricity rather than petrol.
Sure, the top speed of around 150mph is still a long way off the 200mph-plus speeds you see in F1. Yet the fact that electric cars are racing around tracks at even these high speeds proves once again that electric cars are coming of age.
That’s great news for the manufacturers of the cars and their components. However, it’s even better for the miners extracting one of the key minerals used in them…
Lithium – the fuel of the future
Most modern electric cars depend on lithium batteries. Lithium has a big advantage over other metals: it has a very high energy density. In other words, it can store a relatively large charge while keeping the battery small and light. This is a particularly important factor in cars, where excess weight can reduce top speeds and increase fuel consumption.
Lithium-ion batteries are also generally more reliable than chemical or lead batteries. That’s why they are widely used to power most portable consumer electronics, such as laptops, tablets and smartphones.
Lithium batteries are also increasingly used to store the energy generated by solar panels – both domestic and commercial. This allows people to store electricity generated during the day for use at night, for example. Indeed, with the price of solar panels falling, storage costs are the only real remaining barrier to solar energy replacing conventional sources for hundreds of millions of people.
Last month, Tesla announced that it would be selling large versions of its car batteries for as little as $3,500. These are aimed at businesses and homeowners who want to go ‘off-grid’ and rely on their own sources of power (or at least rely less on mains electricity). While this is still too expensive for most consumers, experts believe that these prices will tumble as Musk’s company start to mass-produce them on a large scale in a ‘gigafactory’.
Lithium has many other uses, ranging from ceramics and glass to drugs (where it is an important anti-depressant), to the manufacture of aluminium. Of these, the ceramics industry is the most significant, accounting for around 30% of lithium used.
However, thanks to the rapid increase in electric cars, solar storage and consumer electronics, the amount used to produce batteries is growing rapidly.
Goldman Sachs has predicted that, if it reaches full capacity, Tesla’s factory alone could end up soaking up no less than 17% of all current lithium production. It is expected to take over the role as the primary consumer of lithium within the next two years.
Of course, overall demand will expand more slowly. But most industry experts think that total lithium consumption should expand by around 10% a year for the next decade – which means that by 2025, consumption will be around four times the level in 2011.
Can lithium supply keep up with demand?
Until now, lithium production has managed to keep up with increasing demand. But that looks set to change.
Traces of the element are easily found all around the world. The problem is that most of these deposits aren’t large enough to be viable. Right now, the only way to get lithium is to take it from brine deposits or mine it from beneath the ground. One consequence is that production is concentrated in a few countries – Bolivia alone accounts for more than 40% of production.
The situation is further complicated by the fact that China, which is already a major lithium consumer, is aggressively investing in lithium (along with other rare-earth metal) projects around the world. While some see this as a defensive move, others think that Beijing may be trying to gain a competitive advantage by denying other countries future access to reserves.
Either way, China is clearly concerned about the risk of a shortage, and is trying to get ahead of the curve while supplies are still cheap.
The combination of rapidly increasing demand coupled with supply constraints means that prices are likely to rise. And that makes it a good time to be a lithium miner.
Of course, as we know well from previous mining booms, this is a risky business. Lithium mining is extremely capital intensive – chances are that many of the small companies who have sprung up looking to cash in on the boom will fail. But there are some interesting miners out there who believe they have found more effective methods of extraction.
So if you’re looking for something high-risk but potentially profitable, then my colleague Bengt Saelensminde recently looked at the lithium battery industry in depth in MoneyWeek magazine. In it, he lists three promising small-cap miners for investors with strong stomachs. If you’re not already a subscriber to MoneyWeek, you can get your first four issues free here.
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