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Lithium Demand Could Triple by 2025. Does the World Have Enough?

It seems difficult to believe now, but it wasn't that long ago the world was worried about "peak oil." That was the name given to concerns that the planet's petroleum production would eventually dwindle as readily accessible supplies were exhausted. The fears made sense in the context of the time. In 2005, the United States met 60% of its petroleum demand through imports. A few years later, the price of a barrel of oil hit its all-time peak at over $145.

Of course, the context is very different today. Shale production technologies have created a world awash in oil. In September 2019, the United States exported more petroleum products than it imported for the first time since records began. Crude oil trades at less than $54 per barrel.

Energy investors may no longer be concerned about Peak Oil, but they've found new sources of anxiety. As the world begins to electrify ground-based transportation, demand for lithium is set to soar virtually overnight. Lithium demand could triple from 2019 levels by 2025. Will the world be able to cope with shifting consumption?

Image source: Getty Images.

What is global lithium production today?

There are two main lithium compounds today: lithium carbonate and lithium hydroxide. The former is typically produced from brine deposits (namely those in South America), while the latter is typically produced from rock deposits (primarily those in Western Australia). Each commodity trades at a unique selling price in regional markets. However, all global lithium resources, reserves, and production volumes are measured in lithium carbonate equivalents (LCE).

Albemarle (NYSE: ALB), the world's leading lithium producer, has published detailed production and consumption reports for investors to pore over.

In 2019, Albemarle estimates the world produced 325,000 metric tons of LCE, although demand was only 275,000 metric tons of LCE. An estimated 45% of total production was sourced from brine deposits, while an estimated 60% of the total comprised lithium carbonate.

Lithium Material

Estimated Output by Deposit Type, 2019

Estimated Production, 2019

Lithium carbonate

76% of brine output, 47% of rock output

195,000 metric tons of LCE (60% of total output)

Lithium hydroxide

17% of brine output, 25% of rock output

70,000 metric tons of LCE (21% of total output)

Specialty lithium compounds

7% of brine output, 28% of rock output

60,000 metric tons of LCE (19% of total output)

Total

N/A

325,000 metric tons of LCE

Data source: Albemarle.

The global market is expected to rapidly change in size, the favored type of deposit, and commodity composition.

How much is lithium production expected to grow?

Lithium hydroxide comprised only 21% of total output in 2019, but the commodity is the preferred battery-grade material. It's expected to become the dominant lithium compound by 2025. Producers are investing in two areas to respond to demand increases for the commodity. First, an increasing share of global lithium carbonate production will be converted into lithium hydroxide. Second, producers are developing higher-quality rock deposits capable of producing higher shares of lithium hydroxide.

Here's how Albemarle expects the global lithium market to change by 2025.

Lithium Material

Estimated Output by Deposit Type, 2025

Estimated Production, 2025

Lithium carbonate

76% of brine output, 16% of rock output

410,000 metric tons of LCE (40% of total output)

Lithium hydroxide

17% of brine output, 72% of rock output

525,000 metric tons of LCE (50% of total output)

Specialty lithium compounds

7% of brine output, 12% of rock output

105,000 metric tons of LCE (10% of total output)

Total

N/A

1,040,000 metric tons of LCE

Data source: Albemarle.

In the six-year period spanning 2019 to 2025, Albemarle expects global lithium production to jump 220% and global lithium demand to jump 263%. Will the market be stressed?

Does the world have enough lithium?

Given the expected surge in lithium demand, investors might wonder if the world will run out of lithium. To be blunt, the planet absolutely has enough lithium resources to meet demand between now and 2025. It probably has enough resources to meet demand for the entire 21st century.

Consider that some estimates peg global resources at 210 million metric tons of LCE. While not all resources become reserves, and not all reserves become production, the numbers are pretty favorable for meeting demand. For perspective, total annual demand is expected to reach 1 million metric tons of LCE by 2025.

The planet probably has resources much greater than 210 million metric tons of LCE. The reality is that human civilization hasn't required much lithium until now, so there was relatively little effort put into discovering, characterizing, and developing resources. Significant new deposits are still being discovered. For example, in summer 2019, scientists announced the discovery of a new rock deposit in southwestern China that could hold an estimated 2.5 million metric tons of LCE.

What's more, the world's largest lithium producers own a significant amount of undeveloped resources. Albemarle expects to grow production from 85,000 metric tons of LCE in 2019 to as much as 225,000 metric tons by the early 2020s. That plan would only utilize 60% of the company's available resources, which suggests the stock could have significant growth baked in.

Sociedad Quimica y Minera (NYSE: SQM), the world's second largest lithium producer, also has vast untapped resources. Last year, in an attempt to help balance global markets, the company and its 50/50 joint venture partner delayed an expansion of their Mt. Holland project in Western Australia. When completed in 2021, the asset will have the capacity to produce 120,000 metric tons of LCE per year. The deposit contains an estimated 7 million metric tons of LCE.

There are numerous other projects from second-tier lithium producers coming online this decade. Livent Corporation (NYSE: LTHM) is ramping up capacity of its lithium carbonate assets in South America, which increasingly will be converted to lithium hydroxide (although it, too, announced a production delay). Lithium Americas (NYSE: LAC) owns valuable assets in South America in addition to Thacker Pass, the most prominent lithium deposit in the United States.

The real concern for investors

There's no doubt that the world has enough lithium to meet demand for the foreseeable future, but there's still a legitimate concern for investors to consider: Can the world ramp up production quickly enough -- or responsibly enough -- to meet that demand?

That may sound a little ridiculous at first, especially considering the global market was oversupplied in 2019. But nearly tripling output in just six years without throwing the near-term market balance too far out of whack will be a difficult task. Balancing supply and demand will require coordination of many global producers. There's also the risk that the 1 million metric tons of LCE demand Albemarle expects in 2025 fails to materialize. Whether due to a global recession or electric vehicles simply not living up to the near-term hype, such a scenario could result in grossly oversupplied markets.

Simply put, investors cannot forget that lithium carbonate and lithium hydroxide are commodities. Selling prices can be volatile. Producers can royally screw up market balances, especially considering brine production takes weeks to complete in evaporation ponds, which are not able to quickly respond to market shocks.

Today, lithium carbonate and lithium hydroxide sell for roughly $10 per kilogram and $13 per kilogram, respectively, on the Asian spot market. If producers cannot meet demand quickly enough, prices could soar back to the all-time peak of $20 per kilogram. If demand fails to materialize, prices could slip closer to the marginal cost of production, estimated at about $7 per kilogram for each commodity.

But hey, at least the world has enough.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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