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Money & Markets: Demand for lithium is fuelling a new commodity cycle

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There is a new commodity boom under way. Lithium is in ever-increasing demand in the batteries that power electric cars and the world’s mining companies will have to gear up to supply it.

Metals that were once obscure are becoming more and more important to engineers as crucial ingredients of ever-more sophisticated technology. These materials need to be produced and it is markets that kick into gear to supply them.

Classically, markets are driven by fear and greed. In a bull market, when prices are marching ever upwards, greed reigns. It knows little logic. In a greedy bull market, no one cares about the numbers, they just want to participate. In a sense fear also rules, but it has been translated into ‘FOMO’ – fear of missing out.

Few things tickle the greed synapses like commodities. Humans have probably been naturally selected over the ages to love mines and mining. Gold fever is, as the young folk say, ‘a thing’. The idea of pulling wealth from the ground sets many an investor afire, and mining companies and pure commodity trading have ravenous and loyal followers. There is nothing like a commodity boom to drive a speculative frenzy.

Back in my youth, the ‘speculator’ was a despised person. Taking a financial position to gain on a change of fate of companies, currency or goods was seen as immoral, toxic and near criminal.

That changed and many were later convinced that speculation was good and that speculators were facilitators of efficient economics and helpers in the process of optimum distribution of resources.

It’s still an open left/right political debate but, whatever the view, speculators move infinitely faster than centrally controlled government monoliths. A lifespan of a piece of technology is often much shorter than the reaction time of a government, and the financial markets quickly steer capital to where it is needed because thousands of financial agents simply care about making as much money as possible as fast as possible.

Such a commodity boom is under way right now, and the commodity is lithium.

Love them or hate them, electric vehicles are going to take over. Until further notice they will have lithium batteries. Meanwhile large storage technology using massive arrays of lithium batteries are being brought to reality at a breakneck pace by engineering visionaries like Elon Musk.

The miners of the world will have to produce a lot more lithium for a world turning towards mainstream electricity storage. The price is what the market loves the most: a one-way bet, and the bet is up.

In such a situation there is near infinite money for would-be lithium miners. The commodity cycle is kicking off once again. The commodity cycle is a well-established process and it goes something like this:

  1. Demand for a commodity rises.
  2. The commodity price rises.
  3. Miners increase production but can’t keep up with demand.
  4. More reserves with fat profit potential are sought out and brought into production.
  5. Prices are still rising because even new production can’t slake demand.
  6. Miners in production make great profits.
  7. More reserves with slim profit potential are found and brought into production.
  8. Prices stabilise.
  9. Fat profits are made.
  10. More reserves are brought online, many with not-so-great profit margins.
  11. Supply passes demand as high prices bring more efficient usage and reprocessing.
  12. Yet more supply comes online.
  13. Prices crash.
  14. Miners cannibalise themselves trying to stay in business.
  15. Prices continue to fall.
  16. Production goes offline.
  17. Demand and supply reach equilibrium.
  18. More production goes offline.
  19. Remaining miners make very slim profits.
  20. Cycle ready to repeat.

This cycle is heavily dependent on markets because it is the speculators’ hunger for mining stocks that drives the uptake of production through the capital generated by share and debt instrument issues.

This is a process that has just begun for lithium and it will be a theme for many years to come. The established players have already risen steeply on the NYSE, companies like SQM (Sociedad Química y Minera de Chile) booming and up nearly 100 per cent since the summer. There are only three majors, and Albemarle and FMC Corporation are chemical conglomerates where lithium is only part of the picture. This leaves a mining void that will be filled with a plethora of utterly speculative operators aiming to hit it rich with lithium or through stock promotion or both.

Investors will shower these minnows with cash and some of them will become major producers or vendors of major resource reserves to big mining companies. Like technology start-ups, most will fail and some will become giants.

Overall, this process of wild speculation will accelerate the production of lithium, and as long as prices are high production will curve up to meet it.

The market saying is: “The cure to high prices, is high prices”, and speculation is the medicine.

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