The all-electric future, where homes, cars and buildings run on clean energy, depends on a host of raw materials, but perhaps one more than the rest: lithium. Prices for the key metal have shot up over the last year as projections suggest demand is going to vastly outstrip supply. On one side there’s automakers promising vast electric vehicle fleets. Projections for the rate of EV adoption vary widely. But the consensus is that EVs will increasingly chip away at the internal combustion engine’s dominance on the road in the coming decades. On the other side there’s the very real constraints of the mining industry, which is capital and resource-intensive. On top of that, permitting processes can be complex, and new mine proposals can face local opposition that can stall projects for years. Lithium is so high in demand because while battery chemistries vary, at present lithium is the common denominator due to its high energy density per unit. Add in batteries for energy storage – both residential and utility scale – and a lot more lithium is needed. The International Energy Agency estimates that in order to meet the goals in the Paris Agreement, lithium demand will grow by over 40 times by 2040. “There just aren’t enough projects on the supply side that can catch up with the demand that’s out there ,” said Cowen managing director David Deckelbaum. This disconnect between what we have now and forecasts for what we’ll need has fueled lithium’s gains. Prices rose more than 300% last year on a global basis, according to Benchmark Mineral Intelligence. The ascent has continued. Prices have already doubled in 2022, setting new records. In some places the move was far more extreme. Battery-grade lithium on the Chinese spot market surged more than 500% last year. After hitting a March record, China’s spot prices have cooled due to Covid lockdowns, but the decline still leaves prices hovering near all-time highs. “[G]lobally prices are still on the up as contracts internationally tend to lag behind whatever happens in the Chinese market, so the Q1 rally is still taking effect outside of China,” noted Daisy Jennings-Gray, senior price analyst at Benchmark. Supply concerns don’ t stem from a lack of lithium. It’s by no means a scarce resource, and it’s found all over the world. At present it’s predominantly extracted in South America and Australia. China dominates the refining and processing market. Securing US lithium supply Given lithium and other raw materials’ crucial role in the energy transition, the Biden administration has stressed the importance of shoring up US supplies.The White House invoked the Defense Production Act in March in an effort to spur domestic production of these vital materials. White House earmarked $3.1 billion to bolster US refining capacity. s, and supporting existing operations will not, on their own, make a material difference to the sector, nor to the supply chain issues,” said Morgan Bazilian, director of the Payne Institute for Public Policy, in March when the DPA was invoked. Still, I have noted that the optics are important. Invoking a wartime executive tool shows a “level of seriousness,” he said. Jon Evans, CEO of Lithium Americas, is acutely familiar with the challenges facing the US mining industry. The company has spent more than a decade trying to get its Thacker Pass mine in Nevada up and running. Evans hopes to break ground on the company’s mine by the end of the year, after opposition from environmentalists and Native American tribes in the area delayed it. “As far as the ESG implications of domestic mining … it’s a complex tradeoff across time horizons where both environmental and geopolitical/national security risks must be taken into balance,” Morgan Stanley said in a recent note to clients. Once the necessary permits are secured, a mine doesn’t immediately begin producing. According to Vance Brown, managing director and portfolio manager at Williams Jones Wealth Management, a greenfield lithium mine can take between three and five years to begin producing. “For this reason, we do not see a material supply response for the next 12-18 months,” he said. At present, Albemarle’s lithium mine in Silver Peak, Nevada, is the only major facility in the US A boost to profits This is not the first time lithium prices have arisen. The metal’s value shot up between 2017 and 2018, before subsequently collapsing as the market became oversupplied. EV demand didn’t match forecasts, leading to misalignment in the market. Over the next few years, producers scaled back and shelved expansion plans, gradually eating away at the once oversupplied market. High spot prices do not necessarily translate to a bottom-line boost for miners due to contract structures. Still, companies are starting to reap the rewards of the price ascent, which was on full display during Albemarle’s and Livent’s recent quarterly updates. “They both shattered the quarter in terms of EBITDA projections,” noted Cowen’s Deckelbaum. “This is the most attractive these names have looked on a valuation basis probably ever.” Albemarle said first-quarter revenue surged 36% year over year to $1.13 billion. Net sales of lithium alone climbed 97% during the quarter to $550.3 million. As lithium prices move higher, the company is renegotiating contracts so that it can capture more of that upside. “It’s an evolution of our strategy around pricing,” Albemarle CEO Kent Masters said of the company’s contract renegotiations on a call following its first-quarter earnings results. “We are more indexed to the market today than we were a year ago, definitely, and that was by design,” he said. Looking ahead, the Charlotte, North Carolina-based company expects sales of between $5.2 billion and $5.6 billion this year, up from the prior guidance of $4.2 billion to $4.5 billion. Shares of Livent, meantime, soared 30% on May 4 , one day after the company posted its first-quarter results. During the period, Livent reported sales of $143.5 million, up 17% from the previous quarter and 56% year over year. The company now expects to report revenue between $755 million and $835 million in 2022, up from prior forecasts of $540 million to $600 million. “Both ALB and LTHM, two of the world’s major lithium producers, demonstrated a step change higher in profitability and raised guidance for 2022 substantially,” said Williams Jones’ Brown. “The effects of about a ~7X increase in lithium prices over the last 18 months are working their way through the income statements of both companies,” he added. Despite these strong results, the stocks are coming off a losing week amid a broad-based market sell-off. The market as a whole has declined sharply, with tech and growth-oriented stocks registering outsized losses. Rising rates make these companies’ future profits less attractive, and when market conditions turn risky investors have a tendency to flee towards safe-haven assets. As Deckelbaum put it, lithium stocks have been thrown out with the bathwater. Inflationary pressures Just as the group might be unfairly hit by trends in the market, it’s also not immune from what’s playing out in the economy — in this case, inflationary pressures. And at a certain point, too high lithium sparks a demand slowdown. Rising raw materials costs push up prices for automakers, which then in turn look to pass these higher costs to consumers. This can ultimately lead to demand destruction. According to a report from Bernstein, relying on data from China-based EV manufacturer Nio, batteries make up 42% of the cost of an EV. “Within the boardrooms of many car OEMs, we suspect there is an active debate as to the role auto OEMs should play in the business of batteries,” the firm said in a note to clients. Auto companies are, of course, well aware of surging prices. “Price of lithium has gone to insane levels!” Tesla CEO Elon Musk said in an April 8 tweet. “Tesla might actually have to get into the mining & refining directly at scale, unless costs improve.” Whether or not Tesla actually enters the lithium mining space remains to be seen, but the comments are notable nonetheless. In addition to Albemarle and Livent, other players in the space include Chile-based SQM and China-based Ganfeng Lithium. There’s also Lithium Americas and Piedmont Lithium , which are both focused on building out US operations. To date neither has produced any lithium. Eddie Ambrose, partner at Sound View Wealth Advisors, said that while lithium will be a growth story going forward, it remains to be seen which companies will be the winners. So rather than bet on individual stocks, he parks capital from his growth-oriented investors in the Global X Lithium & Battery Tech ETF. The fund has $4 billion in assets under management. Albemarle, Yunnan Energy, Panasonic Holdings, Eve Energy and TDK Corp are the top holding companies. “We know lithium is going to survive, we just don’t know if all these companies are going to survive,” Ambrose said.