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How much charge is really left in the lithium boom?

The lithium boom has delivered real value already, but how much more is there to come?

Lithium demand is on the rise, but so is supply

How much of a lithium boom will there be this time next year?

That’s a pertinent question for investors who have been booking huge gains on the likes of European Metals Holdings Limited (LON:EMH)(ASX:EMH) and Nemaska Lithium (TSE:NMX).

Shares in European Metals have risen more than tenfold since the beginning of last year to a current price of 67p in London. Meanwhile, shares in Nemaska Lithium have risen by nearly 200% to a current price of C$1.24, and that’s after giving up quite considerable ground since the start of 2017.

And these are not the only winners from the current market appetite for lithium. The established players, Albemarle (NYSE:ALB), Sociedad Quimica y Minera de Chile (NYSE:SQM) and FMC Corp (NYSE:FMC) have all been on strong upward trend for several years.

Albemarle currently has a market capitalisation of US$12bn, so it’s of quite a different ilk to more junior newcomers like European Metals, but even at the larger end of the market share price moves have been marked.

Albemarle shares have increased 150% since late 2015.

Shares in SQM, currently capitalised at over US$8bn, have risen by more than 200% over the same period – they enjoyed a particularly strong burst when Tianqi Lithium Industries (SHE:002466) came in for 2.1% back in September, paying more than a 50% premium.

Shares in Tianqi itself, meanwhile, have risen fourfold since 2015, giving the company a market capitalisation of over Y38bn on the Shanghai Exchange, or US$5.7bn assuming a 0.15 Yuan-dollar rate.

FMC Corp shares are up by more than 60% since the mining bear market officially turned at the beginning of 2016, although with a heavyweight agricultural business also to its name FMC has many more strings to its bow than just lithium.

All told though, this strength at the top-end of the industry speaks of more than just a speculative spike on a few headlines about Tesla.

That entry of a major Chinese player tells of international interest in breaking apart the old oligopoly.

And that’s a process that will only be accelerated by the arrival on the scene of new and diverse companies such as MGX Minerals (CNSX:MGX), which hopes to extract lithium from oilfield waste, and the privately-held Cornish Lithium, which hopes to transform the English energy industry by extracting lithium from brines flowing in the rocks beneath Cornwall.

So the lithium industry is changing fast before our very eyes - at one time SQM produced around 50% of the world’s lithium, but in recent years that market share has been whittled down to just over 24% by the likes of Albemarle and Tianqi.

Albemarle operates North America’s only producing lithium project, in Clayton Valley, Nevada, while Tianqi owns the old Talison assets in Australia, as well as two projects in China.

And Tianqi may be the one to watch at the top end as it is the most vertically intergrated of all the lithium producers by some margin – it owns two of the largest lithium production plants in the world, one in Sichuan, the other in Jiangsu, and is investing in a third in Australia.

The world is shifting east – we know that much already. But how much the lithium industry will really fragment in favour of the smaller players remains open to question.

Sure, the juniors are doing well now, the lithium price is on a tear and some of the majors are playing catch-up. But, as with rare earths, there isn’t actually much of a shortage of lithium in the world. It’s easy to get. The real question is how economic is it to produce.

It’s here that the debate is still waging. Annual contract for lithium carbonate have settled in the US$10-US$16 per kilogramme range this year, roughly double last year’s price, so that’s round one to the bulls.

But Reuters reported in February some signs of a weakening of the lithium carbonate price in China and speculated that this could be in part due to the effects of new supply now beginning to come on stream.

It cited three new projects in particular as having an effect: the Olaroz brine operation of Orocobre (ASX:ORE)(TSE:ORL), the Mt Cattlin mine of Galaxy Resources (ASX:GXY), and the Mt Marion mine of Neometals (ASX:NMT).

What’s more, Tianqi’s decision to develop its new plant in Australia implies plans to increase production from its Greenbushes mine there.

So more supply is coming at the top end.

Whether new demand from electric cars will soak up all that supply and leave a shortfall still remains to be seen, but the more cautious analysts point out that the bigger players still hold the whip hand.

At Clayton Valley and in Chile, producers can switch on more production almost at will. That could end up giving the oligopoly the kind of power that the major iron ore companies have to drive juniors out of the market at times of weakening prices.

Against that though, Luke Kissam, the chief executive of Albemarle, is on record with a prediction that lithium demand will rise by 20,000 tons per year until 2021. Analysts reckon the market this year will balance at between 100,000 tons and 120,000 tons, so in percentage terms those are big rises that the majors will need to be able to supply into.

Yet more supply is on the way: Albemarle’s LaNegra 2 project will hit full production in 2018. But whether the majors can keep fully apace with incremental demand increases like that if they carry on rising past 2021 remains to be seen.

So although one line of thinking has it that the juniors will only be able to play around the edges of this dynamic, the bulls are still holding onto the major selling point that has driven markets thus far: lithium is the metal of the future.

What’s more, on the costs side extraction technologies are improving all the time. In the case of brines technology from the likes of Pure Energy Minerals (CVE:PE) and ENIRGI look set to cut processing times dramatically, freeing up capital for further development work.

According to Jeremy Wrathall, the chief executive of Cornish Lithium, the new processing technologies are no longer “rocket science”, but rather are just “early stage.”

It wasn’t long ago that the same was being said about electric vehicles. 

Quick facts: European Metals Holdings

Price: 15.6 GBX

Market: AIM
Market Cap: £24.3 m

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