We hear about “market disruptors” and “megatrends” all the time, but most are interesting fads or never pan out for one reason or another.
And sometimes we see a technology — or technologies — that looks to be a game changer, but fail to see the real, underlying opportunity.
Take rare earth elements (REE) for example.
There are 17 of these elements that are crucial to our modern world, from mobile phones to computer chips to telecommunications. And demand for them is growing.
Most of us look to a telecom stock or a mobile phone maker to invest in this massive trend. But the real play is in the fundamental building blocks for the technology.
A chip maker or phone company may come and go, but it will be replaced by another that will demand the same production materials.
The problem with most REEs is that they’re found in some of the world’s most… let’s say politically unpredictable places (like the Democratic Republic of Congo, or Sudan), so the miners are hard to access.
China has ratcheted up its REE production to the point where it doesn’t have to worry about the global market — or the U.S. — setting prices. But that still doesn’t really help investors.
The other challenge is most of the REEs are found in trace amounts, not veins like gold or silver. That means you have to excavate huge amounts of material and process it to get small amounts of the REEs. It’s a resource-heavy investment.
But there is one way to invest in the tech mega trend by looking at one material that’s far more accessible. As a matter of fact, it has its own huge demand curve that is already starting to give us a taste of what’s to come.
I’m talking about lithium. Now, lithium isn’t exactly an REE. It’s the 25th most abundant metal in production.
However, lithium is becoming one of the most in-demand metals in the world today. And if you’re looking for what I call an ‘every day indicator’ look to the cars rolling up and down the roads of your town or city.
More and more have lithium-ion batteries powering some piece, if not the entire car.
Lithium is also the energy storage material of choice for mobile phones, laptops and virtually any portable electronic device on the market today.
And demand for this next generation energy storage solution is growing at a huge rate. I usually only pay attention to The Economist magazine in a very limited way, but last year, the magazine noted that lithium prices surged at the end of 2015 into 2016, from about $6,000 a ton to almost $14,000 a ton in a single month. China was leading the surge in demand.
Lithium finished 2016 at around $7,500 a ton, but that’s still more than a 20 percent sustained move in a year.
Each Tesla electric automobile that rolls off the assembly line requires about 120 pounds of lithium for its batteries. And CEO Elon Musk is just finishing production of his battery ‘gigafactory’ in Nevada where he plans to make batteries for 500,000 cars (his and others).
Then consider the fact that Ford, Nissan, GM, Mercedes, BMW, Toyota, Honda, Mazda, Hyundai and Kia are all ramping up production of electric or hybrid vehicles.
Goldman Sachs estimates that for every 1 percent growth in battery electric vehicle penetration, there is an increase of 70,000 tons of lithium production.
Right now, electric vehicle (EV) sales are growing by 50 percent a year. In China, EV sales were up 223 percent in 2015. Worldwide, retail sales of EVs were up about 50 percent in 2016. While that growth should slow as the market expands, it will still be significant.
So if you’re looking for some “buy and forget” stocks for your grandkids, buy one or all of these three major lithium miners:
Sociedad Quimica y Minera de Chile (NYSE: SQM), Albemarle Corp (NYSE: ALB) and FMC Corp (NYSE: FMC) control about 70 percent of the market, buying a bit of each will diversify your lithium investment. SQM is based in Chile and ALB and FMC are both based in the U.S. All three also produce other chemicals, including fertilizers, which will benefit from any growth in the global economy.
In 20 years, it’s very likely lithium will be the ‘new silver’ if not the new gold.
— GS Early