| Katusa's Investment Insights | | Boom, Bust, and Echo: Mastering the Lithium Market By Marin Katusa | | Imagine riding a roller coaster that takes you to thrilling heights and then drops you into stomach-churning lows—that’s the lithium market.
This essential metal is still in its early years of market development. Yet, it plays vital roles in powering our electric cars and storing electricity generated from renewable energy facilities.
However, for such a vital commodity, it’s anything but stable. For investors, this wild ride means potential big gains and gut-wrenching losses.
Booms and Busts in Lithium Prices
Like most commodities, lithium prices are very cyclical. In periods when demand is expected to outstrip supply, prices rise rapidly. Contrarily, when demand slows or supply increases, prices fall.
In the chart below you can see the enormous run lithium went on from 2021 through 2022. Lithium carbonate prices in China soared over 1,200%, and then over the past year collapsed, falling 86%. | | In new markets, volatility is heightened which is what we are seeing here. This is because new participants are rapidly entering and exiting the market. As an investor in this market, you must have testicular fortitude and the ability to ride out big swings and take profits when you see them.
For example: - Investing in Altura Mining early would have been rewarding as it was once a Cinderella story with a market cap over a billion dollars. However, it collapsed under the weight of debt and low prices and ended up filing for bankruptcy just before the market ripped in 2021. Pilbara Minerals acquired the assets in a fire sale for $200M. Imagine being an investor here, seeing the opportunity in lithium but coming up just short because the company was over-levered.
- Or investing in Patriot Battery Metals which became a market darling in 2021-2023 as it began putting out major news flow and drill results. These culminated in a big resource estimate and billion-dollar project economics. Share prices went from CAD$0.35 to over CAD$17 per share.
This is why I love to build positions during the “echo” phase, which comes after the boom and bust. The FOMO money that chased prices up during the boom is gone, and all the sellers have become tired, leaving the company in a rangebound state, dependent upon tangible catalysts of the company and sector. I think lithium is in the process of setting itself up for a moment like this.
The key is figuring out what’s next, and what the major catalysts are for the sector and the stock. Because in the echo phase, a rising tide doesn’t lift all boats.
Lithium Market Growth Potential
In lithium, future demand is all about electric vehicles and battery storage. Here are a few key points that set the stage for future market growth: - Currently, all major EV battery forms require lithium, averaging 1.55 lbs per kWh of battery capacity.
- Global battery cell manufacturing capacity is forecast to reach 7.2 TWh in 2030. This is over three times the 2023 total and well above the projected demand of 4.0 TWh.
- Battery capacities in the US and Europe could grow more rapidly than China, supported by rising incentives for establishing localized capacities.
- China and South Korea-headquartered battery-makers will remain indispensable partners in the capacity buildouts in the US and Europe, given their tier-1 expertise on scaling up capacity and as reliable partners to automakers.
- A truly localized supply needs to solve key questions, including whether and how to gain technical know-how from current sector lead China, where to obtain cathode supply, and regarding the sourcing of cost-competitive, regionally made lithium, iron, and phosphate inputs.
The chart below shows the projected growth in lithium carbonate, derived from EV-related sales forecasts. As you’ll see, demand for lithium is poised to rise by 270% over the coming decade. | | The White House’s New Economic Weapon: Foreign Entity of Concern (FEOC)
The FEOC has become the new favorite economic weapon of US politicians. It allows the government to specifically target foreign companies in industries that it believes to be damaging to its own domestic industries. It’s a bold, powerful move by the White House which aims to bolster US and US-friendly supply of EV components and critical metals.
An entity is an FEOC if it’s owned by, controlled by or subject to the jurisdiction of a government of a foreign country that’s a covered nation — and currently the list consists of China, North Korea, Russia and Iran.
Through this FEOC policy, an EV becomes ineligible for the EV tax credit if an FEOC entity supplied any of the vehicle's battery components from 2024 onwards and any of the applicable critical minerals from 2025.
This means that the US EV tax credit will not be applicable to EVs that use the relevant inputs from Chinese-based production, regardless of the location of the producing company's headquarters.
This move to create FEOCs should act as a major catalyst for the US-friendly lithium sector. And the best part is, I think US-friendly lithium assets currently in development or production can be a winner regardless of the US Presidential election to come later this year.
If you missed the last big lithium rush, don’t panic. I think the data speaks for itself that there’s more growth and opportunity on the horizon.
Equip yourself with the knowledge to make informed investment decisions. Consider signing up for my newsletter, Katusa’s Resource Opportunities here to get access to exclusive reports and expert analysis on lithium and all the other important battery metal dynamics.
Regards,
Marin | | | |
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