Lithium To See Strong Start to Year on Supply Deficit: Top Trade Q1 2022

Lithium prices put in impressive gains through 2021, even among the high-flying commodities sector. Electric vehicles and lithium-ion batteries are driving rosy demand prospects going into next year. The International Energy Agency (IEA) forecast electric vehicle sales growth of 40% in 2020 from 2019, an impressive rate of growth. The upside for lithium in the first quarter owes to fundamental tailwinds that have been in place since the pandemic started in early 2020, those being a small base of mining production amid increasing demand.

Lithium is a chemical element metal with a silvery-white appearance used in various industrial and commercial applications. The primary use of lithium is in rechargeable batteries. Futures only began trading in 2021 in the United States and China. Other products are also available to retail investors to take advantage of the underlying price movements. The Global X Lithium & Battery Tech ETF is perhaps the most liquid. Investors can also buy lithium mining companies such as Albemarle Corporation for portfolio exposure.

The lithium market is expected to move into deficit to end 2021, meaning that demand will exceed supply. S&P Global Research is forecasting an 8,000 metric ton (mt) deficit in 2021 following a 2020 surplus of 66,000 mt. For 2022, the market is expected to remain in deficit, with S&P giving a deficit forecast of 5,000 mt. This should keep upward pressure on global lithium prices outside any large contraction in demand. Such a contraction is unlikely given the global recovery is largely expected to continue pace in 2022.

The difficulty in ramping up lithium production is another tailwind, given the difficult mining process for the metal. The lag time from discovery to output is already rather long for mines. However, lithium mining poses specific challenges given the environmental hazards created by extracting the metal from the ground. One of those hazards is tremendous water waste.

A single metric ton of mined lithium expenses nearly 500,000 gallons of water. This puts serious regulatory hurdles on any proposed lithium mining venture, thus limiting the supply and making it extraordinarily expensive for producers. That limits mining to companies with enormous capital to extract the metal, with the majority coming from Australia and Chile. Moreover, any Covid related mining disruptions can increase the supply deficit through next year. Overall, prices look primed to continue rising.

Lithium Prices (% Gain From 04 May 2021)

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--- Written by Thomas Westwater, Analyst for DailyFX.com

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