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Investing in Lithium: The Energy Giants Part 2

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According to Frost & Sullivan, the global market for lithium-ion batteries is expected to double to $22.5 billion in 2016 from $11.7 billion in 2012.

 

Consumer goods and automobile sectors are driving the demand.

The share of the automobile sector in the lithium-ion battery market is expected to grow to 25% in 2016 from 14% in 2012, per the data from Frost & Sullivan. This represents a Compounded Annual Growth Rate (CAGR) of 37%. With the increasing use of lithium-ion batteries in consumer electronic products as well as efforts to promote the use of electric cars by many governments to curb pollution, the demand for these batteries is expected to rise

 

2 Lithium Stocks to Buy Now, Zachs.com

 

Among the elements of the universe, lithium is a real lightweight — the third lightest of them all with an atomic weight of 3, right behind helium at 2 and hydrogen at 1.

But as one of the most conductive metals in existence, lithium is a true heavyweight in the field of energy storage and battery design.

In hot demand as the chief ingredient in batteries where power and long life are critical — such as in electric cars and aerial drones — lithium is rapidly becoming one of the hottest commodities to invest in, driving multiple market segments from mining to manufacturing to advanced electronics.

Unfortunately, that hot commodity may be too hot to handle. It has been known to spontaneously combust, causing its batteries to fully discharge all of their stored energy in a flash — literally. We’ve all seen those YouTube videos of Tesla Motors’ electric car going up in flames when its lithium battery was punctured by road debris.

Will the explosion in lithium production and uses continue to make it one of the most promising commodities to invest in? Or will the literal explosion of its batteries cause its prospects to go up in flames?

Lithium Packs a Powerful Punch

Two important characteristics of lithium make it extremely sought after as the chief material in batteries:

  • High reactivity: Like all alkali metals, lithium atoms give up electrons very easily, making them highly efficient producers of electric current.
  • Light weight: As the third-lightest element in the universe and the lightest of all the solids, manufacturers can pack a tremendous amount of lithium into a small space while still keeping the overall weight of the package ultra light.

 

Combine these two characteristics, and you get an awful lot of electric power packed into a small space that is extremely light — perfect for powering everything from cell phones to tablets to cars to drones, which demand power and long battery life without adding a lot of weight.

Characteristics that make it temperamental to deal with:

  • Flammable and explosive: When exposed to air, oxygen causes lithium to ignite and burn, while nitrogen binds to lithium atoms producing lithium nitride. If there is any water present — even air moisture — the lithium nitride hydrolyzes, releasing ammonia gas (which is caustic and corrosive) and hydrogen gas (which is explosive).

Thus, a simple puncture of a lithium battery’s protective casing can cause lithium to explode as it comes into contact with air and moisture, producing toxic and corrosive fumes and fires that are difficult to extinguish, requiring dry powders to put out. Quite the negative publicity, which has been readily brought to the public’s attention thanks to viral videos of burning cars.

Yet manufacturers are already finding ways of improving even this newest of technologies.

Keeping an Eye on Ions

While lithium batteries are pretty much the best one-time-use power cells on the market, it’s the reusable, rechargeable lithium-ion batteries that are most used in consumer devices from phones to music players to tablets and now even autos. In 2013 alone, over 5 billion lithium-ion batteries were sold to consumers, with demand soaring by the year.

Where disposable batteries use metallic lithium as the negative anode and manganese dioxide as the positive cathode, rechargeable ion batteries replace the manganese dioxide at the positive cathode with lithium cobalt oxide. While this increases energy density, making the batteries longer lasting, it also increases the risks of overheating, fire, and explosion.

To make ion batteries a little safer, manufacturers have replaced the lithium cobalt oxide with either lithium iron phosphate, lithium manganese oxide (one oxygen atom as opposed to dioxide’s two atoms), or lithium nickel manganese cobalt oxide. This latter one (NMC) is the favored configuration for electric cars.

The need for NMC batteries is so huge that Tesla Motors announced last month that it will build its own lithium battery factory — the world’s largest. The company is gearing up to begin production of its next generation electric car in three years’ time, and it doesn’t want any battery shortages to interfere with production.

Investment Opportunities

As the ever-increasing production of portable consumer devices, electric cars, and even electric military equipment will dramatically increase the demand for lithium-ion batteries, lithium may well provide investors with an investment opportunity of a lifetime.

As noted in the graph below, lithium production has already tripled this century, from 200,000 tons in the year 2000 to over 600,000 tons last year.

Source: wikimedia.org

Luckily for manufacturers, mining lithium is relatively inexpensive, especially at brines in high mountain plateaus, where lithium coats the surface of the ground after the sun has evaporated the water from the deposits.

Because miners can simply scrape lithium off the surface of the ground, brine excavation is just about the only lithium extraction game in town, with actual hard rock mining of lithium priced out of the market by the brines.

The highest concentrations of lithium are found in the high altitude regions of the Andes Mountains in Chile, Argentina, and Bolivia, as well as in the mountains of Tibet and China. Mid-range concentrations of lithium can also be found in the mountain ranges of Nevada, California, Colorado, and Utah.

Future electric energy material providers:

  • Sociedad Quimica y Minera (NYSE: SQM): This $8.7 billion mid-cap based in Chile is the largest producer of lithium in the world in the largest lithium-producing country in the world. While lithium production is only 10% of the company’s output, the company mainly engages in the production and distribution of specialty plant nutrients, iodine and its derivatives, potassium chloride and potassium sulfate, industrial chemicals, and other commodity fertilizers. So you get some diversification. The stock jumped some 30% from $26 to $34 on Tesla’s announcement of its proposed new car model and battery factory.
  • FMC Lithium, a division of FMC Corp. (NYSE: FMC): This $10.4 billion American large-cap is the world’s second-largest producer of lithium, with a 23% market share. The company’s main focus is in agricultural, consumer, and industrial markets for crop protection chemicals, including insecticides, herbicides, and fungicides. Its stock also rallied on Tesla’s news, rising some 9% from $72 to over $78.
  • Rockwood (NYSE: ROC): This $5.9 billion American mid-cap recently purchased a 49% share in Talison Lithium, granting it access to the largest known lithium reserves in the world. The company develops, manufactures, and markets specialty chemicals including lithium and rubber/thermoplastic components to the auto industry. Its stock has risen some 17% over the past month from $68 to $80 on Tesla’s news, as well as on improved company positioning within its markets.
  • Global X Lithium ETF (NYSE: LIT): Of course, you also have a lithium ETF if you want to spread your investments across multiple holdings. Trading since 2010, LIT holds all three of the above listed lithium producers as its top three holdings — FMC weighted at 19.31%, ROC at 19.15%, and SQM at 7.5%. LIT’s shares have risen 16% from $12 to $14 over the past month.

Lithium’s Powerful Future

Although there are already some experiments being conducted on even newer battery technologies using magnesium-ion cells instead of lithium-ion, still more powerful batteries than magnesium cells are sticking with lithium — including lithium-sulphur and lithium-oxygen combinations.

Given its light weight, ease of chemical reactivity, and inexpensive extraction and production, you can bet on lithium powering cell phones, laptops, tablets, cars, drones, and all the other new gizmos the next generation of techies will invent.

In fact, lithium presents us with a rather longer-term investment opportunity compared to most technologies. By investing in materials that are used across multiple technologies rather than investing in an individual device or brand, we avoid the short-term crashes that come from a company or product that has suddenly been made obsolete by a competitor.

While electronic consumer products and companies come and go, lithium will remain as the product that will power them all for decades to come. This featherweight packs

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UBS: Economy Still Facing Deep Risks

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UBS: Economy Still Facing Deep Risks

Economists at UBS warn that even after an uptick in economic activity in May and June, the pace of recovery slowed in July as consumers, workers and businesses remain cautious.

The economists believe that the unemployment rate will be hovering around 10% by the end of the year. However, they do expect a strong jobs recovery next year as the country wins the battle against the pandemic. They expect the country’s GDP to rise 5% in 2021 as the economy slowly returns to normal.

The Basis of Models

UBS’ chief US economist Seth Carpenter added that the models that UBS is basing their GDP projections on don’t factor in a large increase in new infections. This is something that could add another hurdle to the recovery. Alan Detmeister, a UBS economist, believes that the recovery is less about the number of cases. Instead, it’s more about the level of restrictions in place.

“The risks are deep,” said Carpenter during an interview with MarketWatch. He points to three challenges facing the economy as it tries to recover. These three include overall job growth is now slowing, incomes are falling, and both households and businesses are hesitant to make long-term plans.

When it comes to job growth, UBS economists are focused on what he calls “labor-market scarring,” according to Carpenter. He’s worried that the next 6 to 12 months could exhibit a “prolonged dislocation in the labor market,” and added, “What’s going to drive this is how fast people get their jobs back.”

The group also noted that except for the automotive sector, manufacturing jobs saw a drop in growth during July. The labor-force participation rate also slipped in July after gaining ground in May and June. “And within the employed, a large share remained either part-time for economic reasons or employed but not at work,” they noted.

Income Drops to Slow Recovery

Falling incomes will also slow any economic recovery. The bank warns that household incomes will drop 10% at an annual rate. This is due to the expiration of enhanced unemployment benefits and at least thus far, no additional stimulus checks. Even with an extension of unemployment benefits or another stimulus check, the economists say it won’t make up for the massive financial relief that was “the lifeblood to prevent the economy from tanking” from March through July.

This drop in incomes is putting further strain on the retail sector. Bankruptcies are piling up, most recently with Stein Mart announcing it would enter bankruptcy and will likely close most, if not all, of its 300 stores.

Neil Saunders, managing director at GlobalData Retail, notes that Stein Mart is just the latest retailer to go under. He’s also sure that won’t be the last. “The failure of Stein Mart is not only the latest in a long line of retail bankruptcies, it also underlines that even traditionally robust segments like off-price are not immune from pandemic-induced disruption.”

He added, “For a company that, at the start of this year, was in the process of selling itself to a private investment firm, the bankruptcy is an abrupt change in fortunes that shows the immense damage the pandemic has inflicted on retail.”

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Wall Street Insider: The Smart Money Is In Cash, Ready To Buy During A Correction

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Wall Street Insider: The Smart Money Is In Cash, Ready To Buy During A Correction

49% of Americans said they expect to live paycheck to paycheck each month. Additionally, 53% said they don’t have money worth at least three months of expenses saved in an emergency fund.

Those figures are from earlier this year before the pandemic began. Also, as you can imagine, these would be much worse today as the economic fallout from the coronavirus spreads into its fifth month.

Michelle Connell, the founder and president of Portia Capital Management, says the numbers show how weak the US consumer was even before the pandemic, so the prospects of a “v-shaped” recovery are “grim.”

“When the U.S. economic shutdown began in March, we were told to expect a “V- shaped” recovery. The consumer and the economy were originally expected to be fully recovered by the end of 2020 at the latest. Now the grim realities are starting to show,” says Connell.

The Rally and Tech Stocks

She points out that the stock market rally has been concentrated in just a few tech stocks. She also says that essentially every other stock that isn’t a tech stock hasn’t participated in the rally.

Since the S&P 500’s March drawdown of almost 35%, the index has almost retraced the year’s high and is currently 4% up for the year to date. But further analysis finds that only a handful of technology stocks have led this rally,” says Connell. She added that “Investors have focused on the companies that support “shut-in” consumers and workers.

The result has been that the top 10 names in the S&P 500 now comprise more than 27% of the index’s market weight and large-cap growth stocks have returned 20% year-to-date. To a large degree, the other 490 names and other investment styles have not participated. For instance, large to small “value” names are still down between 10%-to-16%% year-to-date.”

She says retail investors overtaken with “boredom” have piled into the markets. She also mentions that they “poured fuel on the government’s fiscal and monetary fire.”

Smart Money in Cash

So what should smart investors be doing right now?

The best idea, according to Connell, is to watch what professional money managers do in their own accounts, not what they are doing in their managed accounts.

And right now, they are in cash.

“You can always determine an institutional money manager’s real opinion on valuations when you ask them what they’re doing with their own money. Currently, many institutions are sitting on cash positions as large as 20% to 25% in their personal accounts.”

She adds, “If you’re sitting in cash, don’t feel dumb. History is on your side — and you are also in good company. Interestingly, over the past 30 years there has been a strong inverse relationship between the unemployment rate and the performance of the S&P 500. This relationship has been upended only over the past five months. Obviously, the $2.44 trillion of fiscal stimulus that has been pumped into the U.S. economy has created an artificial market environment. At some point, this inverse relationship will represent itself and the stock market will correct.”

She says to prepare for the correction by putting together a list of stocks to pick up at bargain prices.

“Be ready for pullbacks in the stock market and dislocations in private markets. And make a shopping list.”

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Gold And Silver Plunge On Vaccine Hopes, Slowdown In New Cases

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Gold And Silver Plunge On Vaccine Hopes, Slowdown In New Cases

Gold prices fell more than $118 per ounce yesterday. It’s the largest one-day dollar loss in more than seven years as hope for a coronavirus vaccine. Additionally, a slowdown in new cases pushed stocks and Treasury yields higher.

Edward Moya, senior market analyst at Oanda, said a report that Russia has developed a coronavirus vaccine had an effect. It served as everything traders needed to lock-in their profits from the recent surge in prices.

The Vaccine and Precious Metals

“Traders who were looking for an excuse to lock-in profits with their bullish gold bets jumped all over Russia’s vaccine news. It didn’t matter that this was somewhat telegraphed,” said Moya. He also said that Russians only starting Phase 3 didn’t matter.

Silver also fell $4.38 per ounce, it’s largest dollar loss on a daily basis since Sept. 23, 2011.

Brien Lundin, editor of Gold Newsletter, went on an interview with MarketWatch. There, he said many investors were actually hoping for a small correction. They wanted one so that they could get into gold and silver before the next leg higher.

“Gold and silver’s run over the past couple of weeks was dizzying in its trajectory and just about everyone marveling at that rise was expecting, and even hoping for, a correction. Well, it’s here, and the metals are simply releasing a bit of the air that had overinflated the market,” said Lundin.

“There was tremendous anecdotal evidence that a great swath of investors had bought into the long-term story for gold and silver and were simply waiting for a pull-back to get in,” he added. “I would expect there’s some reality to this view, and that we’ll see a big influx of investment once it appears that gold has bottomed.”

Reasons for the Climb

Bart Melek, head of global strategy at TD Securities said the recent climb was due to a number of reasons. This includes a falling dollar, lower interest rates, and higher inflation. When the US dollar went against expectations and actually showed strength, precious metals investors quickly headed for the exit.

“The precious metals complex, which posted a spectacular performance over the summer, was driven by a drop in rates, a steady increase in inflation expectations and a falling USD,” said Melek. “The rally is now giving up some of these gains as these drivers lose momentum. Real rates are now rising along with nominal yields due to stimulus optimism and risk appetite, with the USD also off its lows.”

Melek also believes that gold and silver dropped as some investors booked profits. Also, what he says are expectations of an economic recovery due to more stimulus money.

“Specs and CTAs are reducing their gold and silver exposure,” Melek said. This happened “as volatility trends higher and as they take profits out of a crowded trade. The rapid rate of ETF gold and silver purchases, which have been a key driver for the summer rally, are also losing momentum,” he added. The “U.S. economy will continue to positively respond to an additional trillion dollars worth of fiscal stimulus and continued Fed measures,” Melek also mentioned. Given this, “it is quite likely that rates and the dollar may see some better days into 2020.”

Melek adds that the dip in prices is a buying opportunity.

“Correction represents a second chance to get on the gold, silver bandwagon.”

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